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Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
COMMISSION FILE NUMBER 001-31579
DORAL FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
     
Puerto Rico   66-0312162
(State or other jurisdiction of   (I.R.S. employer
incorporation or organization)   identification number)
     
1451 F.D. Roosevelt Avenue,    
San Juan, Puerto Rico   00920-2717
(Address of principal executive offices)   (Zip Code)
(787) 474-6700
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in rule 12b-2 of the Exchange Act).
             
Large accelerated filer o
  Accelerated filer o   Non-accelerated filer þ   Smaller reporting company o
 
      (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common stock: 127,293,756 outstanding as of August 12, 2011.
 
 

 


 

DORAL FINANCIAL CORPORATION
INDEX PAGE
         
    PAGE  
PART I — FINANCIAL INFORMATION
       
Item 1 — Financial Statements
       
    1  
    2  
    4  
    5  
    5  
    6  
    68  
    120  
    120  
       
    121  
    122  
    122  
    122  
    123  
    123  
    123  
       
 EX-10.22
 EX-12.1
 EX-12.2
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2


Table of Contents

DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF JUNE 30, 2011 (UNAUDITED) AND DECEMBER 31, 2010
                 
    June 30,     December 31,  
(Dollars in thousands, except for share data)   2011     2010  
Assets
               
Cash and due from banks ($890 and $2,642 were restricted at June 30, 2011 and December 31, 2010, respectively)
  $ 562,397     $ 355,819  
 
               
Other interest-earning assets ($18,967 and $126,573 were restricted at June 30, 2011 and December 31, 2010, respectively)
    43,967       156,607  
 
               
Securities held for trading, at fair value
    44,589       45,029  
Securities available for sale, at fair value (includes $631,257 and $743,843 pledged as collateral at June 30, 2011 and December 31, 2010, respectively, that may be repledged)
    671,451       1,505,065  
Federal Home Loan Bank of NY (“FHLB”) stock, at cost
    74,565       78,087  
 
           
Total investment securities
    790,605       1,628,181  
Loans:
               
Loans held for sale, at lower of cost or market (includes $119,729 and $121,988 pledged as collateral at June 30, 2011 and December 31, 2010, respectively, that may be repledged)
    301,934       319,269  
Loans receivable (includes $174,333 and $180,447 pledged as collateral at June 30, 2011 and December 31, 2010, respectively, that may be repledged)
    5,688,598       5,588,571  
Less: Allowance for loan and lease losses
    (93,472 )     (123,652 )
 
           
Total net loans receivable
    5,595,126       5,464,919  
 
           
Total loans, net
    5,897,060       5,784,188  
 
               
Accounts receivable
    41,592       28,704  
Mortgage-servicing advances
    54,011       51,462  
Accrued interest receivable
    37,244       38,774  
Servicing assets, net
    115,785       114,342  
Premises and equipment, net
    103,386       104,053  
Real estate held for sale, net
    101,499       100,273  
Deferred tax asset (“DTA”)
    103,958       105,712  
Other assets
    164,192       178,239  
 
           
Total assets
  $ 8,015,696     $ 8,646,354  
 
           
 
               
Liabilities
               
Deposits:
               
Non-interest-bearing deposits
  $ 285,582     $ 258,230  
Other interest-bearing deposits
    1,986,102       2,000,991  
Brokered certificate of deposits
    2,031,108       2,359,254  
 
           
Total deposits
    4,302,792       4,618,475  
Securities sold under agreements to repurchase
    442,300       1,176,800  
Advances from FHLB
    1,342,849       901,420  
Loans payable
    294,623       304,035  
Notes payable
    510,430       513,958  
Accrued expenses and other liabilities
    258,442       269,471  
 
           
Total liabilities
    7,151,436       7,784,159  
Commitments and contingencies (Please refer to Notes 24 and 25)
               
 
               
Stockholders’ Equity
               
Preferred stock, $1 par value; 40,000,000 shares authorized; 5,811,391 shares issued and outstanding, at aggregate liquidation preference value at June 30, 2011 and December 31, 2010, respectively.
               
Perpetual noncumulative nonconvertible preferred stock (Series A, B and C)
    148,700       148,700  
Perpetual cumulative convertible preferred stock
    203,382       203,382  
Common stock, $0.01 par value; 300,000,000 shares authorized; 127,293,756 shares issued and outstanding at both June 30, 2011 and December 31, 2010
    1,273       1,273  
Additional paid-in capital
    1,220,983       1,219,280  
Legal surplus
    23,596       23,596  
Accumulated deficit
    (735,229 )     (738,199 )
Accumulated other comprehensive income (loss), net of income tax expense of $621 and expense of $1,332 at June 30, 2011 and December 31, 2010, respectively
    1,555       4,163  
 
           
Total stockholders’ equity
    864,260       862,195  
 
           
 
               
Total liabilities and stockholders’ equity
  $ 8,015,696     $ 8,646,354  
 
           
The accompanying notes are an integral part of these financial statements.

1


Table of Contents

DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
                                 
    Quarters Ended     Six Month Periods Ended  
    June 30,     June 30,  
(In thousands, except for share data)   2011     2010     2011     2010  
Interest income:
                               
Loans
  $ 79,238     $ 78,916     $ 159,303     $ 160,349  
Mortgage-backed securities (“MBS”)
    9,221       18,542       20,277       41,789  
Interest-only strips (“IOs”)
    1,508       1,491       2,979       3,034  
Investment securities
    130       583       229       1,448  
Other interest-earning assets
    1,020       1,545       2,320       3,685  
 
                       
Total interest income
    91,117       101,077       185,108       210,305  
 
                               
Interest expense:
                               
Deposits
    22,543       27,587       49,442       54,287  
Securities sold under agreements to repurchase
    6,238       13,738       15,357       31,762  
Advances from FHLB
    8,822       12,921       15,430       26,894  
Notes payable
    6,561       5,086       13,214       10,196  
Loans payable
    1,498       1,680       3,040       3,340  
 
                       
Total interest expense
    45,662       61,012       96,483       126,479  
 
                       
Net interest income
    45,455       40,065       88,625       83,826  
 
                               
Provision for loan and lease losses
    13,323       44,617       15,914       58,538  
 
                       
Net interest income after provision for loan and lease losses
    32,132       (4,552 )     72,711       25,288  
 
                               
Non-interest income (loss):
                               
Total other-than-temporary impairment (“OTTI”) losses
    (411 )           (411 )     (40,195 )
Portion of loss recognized in other comprehensive income (before taxes)
    325             325       26,936  
 
                       
Net credit related OTTI losses
    (86 )           (86 )     (13,259 )
Net gain (loss) on sale of investment securities available for sale
    14,808       (137,204 )     17,662       (110,790 )
Net loss on early repayment of debt
    (3,068 )     (2,545 )     (3,068 )     (3,021 )
Net gain on loans securitized and sold and capitalization of mortgage servicing
    9,026       3,605       14,568       6,956  
Retail banking fees
    7,067       7,199       14,073       14,342  
Mortgage loan servicing income (net of mark-to-market adjustments)
    4,543       (1,354 )     13,442       5,390  
Net gain on trading assets and derivatives
    3,373       7,102       2,286       8,091  
Insurance agency commissions
    2,439       2,436       4,661       4,778  
Other income
    695       571       3,884       3,907  
 
                       
Total non-interest income (loss)
    38,797       (120,190 )     67,422       (83,606 )
 
                               
Non-interest expenses:
                               
Compensation and benefits
    21,081       20,315       39,375       36,750  
Professional services
    9,339       15,420       17,976       29,212  
Occupancy expenses
    4,786       4,322       9,126       8,303  
FDIC insurance expense
    3,797       5,574       8,153       10,765  
Communication expenses
    3,636       4,056       7,639       8,000  
Depreciation and amortization
    3,463       3,110       6,666       6,257  
EDP expenses
    3,024       2,878       6,299       6,657  
Taxes, other than payroll and income taxes
    2,923       2,591       5,799       5,155  
Corporate Insurance
    1,490       1,264       3,060       2,526  
Other
    5,785       9,737       11,688       16,302  
 
                       
 
    59,324       69,267       115,781       129,927  
 
                               
Other provisions and other real estate owned expenses:
                               
Foreclosure expenses and other credit related expenses
    2,196       582       4,561       2,723  
Other real estate owned (“OREO”) expenses
    2,061       23,414       4,023       28,011  
Provision for Lehman Brothers, Inc. claim receivable
          10,819             10,819  
 
                       
 
    4,257       34,815       8,584       41,553  
 
                       
Total non-interest expenses
    63,581       104,082       124,365       171,480  
 
                       
 
                               
Income (loss) before income taxes
    7,348       (228,824 )     15,768       (229,798 )
Income tax expense
    2,871       4,487       7,968       7,016  
 
                       
 
                               
Net income (loss)
  $ 4,477     $ (233,311 )   $ 7,800     $ (236,814 )
 
                       
 
                               
Net income (loss) attributable to common shareholders(1)
  $ 2,062     $ (235,726 )   $ 2,970     $ (214,508 )
 
                       
 
                               
Net income (loss) per common share(1)(2)
  $ 0.02     $ (3.50 )   $ 0.02     $ (3.30 )
 
                       
 
(1)   For the quarters and six month periods ended June 30, 2011 and 2010, net income (loss) per common share represents the basic and diluted loss per common share. Refer to Note 28 for additional information regarding net income (loss) attributable to common shareholders.
 
(2)   For the six month period ended June 30, 2010, net loss per common share included $26.6 million related to the effect of the preferred stock exchange. Refer to Note 28 for additional information.
The accompanying notes are an integral part of these financial statements.

2


Table of Contents

DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
                 
    Six Month Periods Ended  
    June 30,  
(In thousands)   2011     2010  
Preferred Stock:
               
Balance at beginning of period
  $ 352,082     $ 415,428  
Preferred stock issued (mandatorily convertible)
          171,000  
Conversion of preferred stock to common stock at par value:
               
Noncumulative nonconvertible
          (48,687 )
Cumulative convertible
          (14,659 )
 
           
Balance at end of period
    352,082       523,082  
 
               
Common Stock:
               
Balance at beginning of period
    1,273       621  
Common stock issued/converted:
               
Noncumulative nonconvertible
          40  
Cumulative convertible
          12  
 
           
Balance at end of period
    1,273       673  
 
               
Additional Paid-In Capital:
               
Balance at beginning of period
    1,219,280       1,010,661  
Stock-based compensation recognized
    1,703       73  
Conversion of preferred stock to common stock at par value:
               
Noncumulative nonconvertible
          17,010  
Cumulative convertible
          19,699  
 
           
Balance at end of period
    1,220,983       1,047,443  
 
               
Legal Surplus
    23,596       23,596  
 
               
Accumulated Deficit:
               
Balance at beginning of period
    (738,199 )     (463,781 )
Net income (loss)
    7,800       (236,814 )
Dividend accrued on preferred stock
    (4,830 )     (4,279 )
Effect of conversion of preferred stock:
               
Noncumulative nonconvertible
          31,637  
Cumulative convertible
          (5,052 )
 
           
Balance at end of period
    (735,229 )     (678,289 )
 
               
Accumulated Other Comprehensive Income (Loss), Net of Tax:
               
Balance at beginning of period
    4,163       (111,481 )
Other comprehensive (loss) income, net of deferred tax
    (2,608 )     139,948  
 
           
Balance at end of period
    1,555       28,467  
 
           
 
               
Total stockholders’ equity
  $ 864,260     $ 944,972  
 
           
The accompanying notes are an integral part of these financial statements.

3


Table of Contents

DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPRENHENSIVE (LOSS) INCOME
(UNAUDITED)
                                 
    Quarters Ended     Six Month Periods Ended  
    June 30,     June 30, 2011  
(In thousands)   2011     2010     2011     2010  
Net income (loss)
  $ 4,477     $ (233,311 )   $ 7,800     $ (236,814 )
 
                       
 
                               
Other comprehensive (loss) income, before tax:
                               
 
                               
Unrealized gains on securities arising during the period
    7,656       41,660       6,964       65,701  
Non-credit portion of OTTI losses
    (325 )           (325 )     (26,936 )
Reclassification of net realized (gains) losses  included in net income (loss)
    (7,462 )     129,749       (11,245 )     122,172  
 
                       
Other comprehensive (loss) income on investment securities, before tax
    (131 )     171,409       (4,606 )     160,937  
 
                               
Income tax benefit (expense) related to investment securities
    28       (25,712 )     711       (24,141 )
 
                       
Other comprehensive (loss) income on investment securities, net of tax
    (103 )     145,697       (3,895 )     136,796  
 
                               
Other comprehensive income on cash flow hedges(1)
    554       1,594       1,287       3,152  
 
                       
Other comprehensive income (loss)
    451       147,291       (2,608 )     139,948  
 
                       
Comprehensive income (loss)
  $ 4,928     $ (86,020 )   $ 5,192     $ (96,866 )
 
                       
 
                               
Accumulated other comprehensive income, net of tax
                               
 
                               
Other comprehensive income on investment securities
  $ 3,794     $ 36,502     $ 3,794     $ 36,502  
Other comprehensive losses on investment securities on which OTTI has been recognized
    (276 )     (3,563 )     (276 )     (3,563 )
 
                       
Total other comprehensive income on investment securities
    3,518       32,939       3,518       32,939  
Other comprehensive loss on cash flow hedge(1)
    (1,963 )     (4,472 )     (1,963 )     (4,472 )
 
                       
Total accumulated other comprehensive income net of tax
  $ 1,555     $ 28,467     $ 1,555     $ 28,467  
 
                       
 
(1)   For the quarters and six month periods ended June 30, 2011 and 2010, other comprehensive loss on cash flow hedges includes $0.8 million and $1.7 million related to a deferred tax asset valuation allowance.
The accompanying notes are an integral part of these financial statements.

4


Table of Contents

DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
                 
    Six Month Periods Ended June 30,  
(In thousands)   2011     2010  
Cash flows from operating activities:
               
Net income (loss)
  $ 7,800     $ (236,814 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Stock-based compensation
    1,703       73  
Depreciation and amortization
    6,666       6,257  
Mark-to-market adjustment of servicing assets
    3,199       8,480  
Deferred tax expense
    2,493       3,126  
Provision for loan and lease losses
    15,914       58,538  
Provision for claim receivable
          10,819  
Provision for OREO losses
    1,375       26,391  
Loss (gain) on sale of OREO
    475       (58 )
Net premium amortization on loans, investment securities and debt
    9,167       8,417  
Origination and purchases of loans held for sale
    (177,825 )     (160,982 )
Principal repayments and sales of loans held for sale
    64,849       95,065  
(Gain) loss on sale of securities
    (27,636 )     108,150  
Net OTTI losses
    86       13,259  
Net loss on early repayment of debt
    3,068       3,021  
Unrealized (gain) loss on trading securities
    (64 )     61  
Principal repayment and sales of securities held for trading
    253,692       151,492  
Amortization and net gain in the fair value of IOs
    500       1,011  
Unrealized (gain) loss on derivative instruments
    (1,021 )     1,594  
Decrease (increase) in derivative instruments
    337       (5,224 )
(Increase) decrease in accounts receivable
    (12,888 )     6,033  
Increase in mortgage servicing advances
    (2,549 )     (22,017 )
Decrease in accrued interest receivable
    1,530       882  
Decrease in other assets
    137,550       66,033  
(Decrease) increase in accrued expenses and other liabilities
    (3,879 )     65,365  
 
           
 
               
Total adjustments
    276,742       445,786  
 
           
 
               
Net cash provided by operating activities
    284,542       208,972  
 
           
Cash flows from investing activities:
               
Purchases of securities available for sale
    (234,764 )     (1,430,635 )
Principal repayment and sales of securities available for sale
    1,075,068       1,852,364  
Proceeds from sale of FHLB stock
    3,522       26,756  
Originations, purchases and repurchases of loans receivable
    (672,013 )     (592,890 )
Principal repayment of loans receivable
    351,265       262,558  
Proceeds from sales of servicing assets
          192  
Purchases of premises and equipment
    (7,068 )     (4,455 )
Proceeds from sales of real estate held for sale
    31,430       10,492  
 
           
 
               
Net cash provided by investing activities
    547,440       124,382  
 
           
 
               
Cash flows from financing activities:
               
(Decrease) increase in deposits
    (315,683 )     297,548  
Decrease in securities sold under agreements to repurchase
    (219,500 )     (687,483 )
Proceeds from advances from FHLB
    145,000       575,000  
Repayment of advances from FHLB
    (160,001 )     (964,000 )
Fees paid on debt exchange and early repayment of debt
    (65,367 )      
Proceeds from other short-term borrowings
          345,000  
Repayment of other short-term borrowings
          (455,000 )
Repayment of secured borrowings
    (9,412 )     (18,384 )
Repayment of notes payable
    (3,724 )     (3,363 )
Issuance of preferred stock
          171,000  
 
           
Net cash used in financing activities
    (628,687 )     (739,682 )
 
           
Net increase (decrease) in cash and cash equivalents
  $ 203,295     $ (406,328 )
Cash and cash equivalents at beginning of period
    383,211       725,277  
 
           
 
               
Cash and cash equivalents at the end of period (1)
  $ 586,506     $ 318,949  
 
           
 
               
Cash and cash equivalents includes:
               
Cash and due from banks
  $ 561,506     $ 318,949  
Other interest-earning assets
    25,000        
 
           
 
  $ 586,506     $ 318,949  
 
           
 
               
Supplemental schedule of non-cash activities:
               
Loan securitizations
  $ 243,719     $ 148,851  
 
           
Loans foreclosed
  $ 47,474     $ 51,965  
 
           
Capitalization of servicing assets
  $ 4,642     $ 3,184  
 
           
Reclassification of loans held for investment portfolio to the held for sale portfolio
  $ 59,917     $ 95,648  
 
           
Reclassification of loans held for sale portfolio to the held for investment portfolio
  $     $ 210  
 
           
Substitution of securities sold under agreement to repurchase with advances from FHLB
  $ 515,000     $  
 
           
Supplemental information for cash flows:
               
Cash used to pay interest
  $ 104,119     $ 131,546  
 
           
Cash used to pay income taxes
  $ 3,824     $ 2,267  
 
           
 
(1)   Does not include $19.9 million and $0.3 million in restricted cash and equivalents as of June 30, 2011 and 2010.
The accompanying notes are an integral part of these financial statements.

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DORAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
         
Note 1 — Nature of Operations and Basis of Presentation
    7  
Note 2 — Recent Accounting Pronouncements
    7  
Note 3 — Cash and Due from Banks
    9  
Note 4 — Other Interest-Earning Assets
    9  
Note 5 — Securities Held for Trading
    10  
Note 6 — Securities Available for Sale
    11  
Note 7 — Investments in an Unrealized Loss Position
    13  
Note 8 — Pledged Assets
    16  
Note 9 — Loans Held for Sale and Loans Receivable
    16  
Note 10 — Allowance for loan and lease losses and Impaired Loans
    24  
Note 11 — Related Party Transactions
    30  
Note 12 — Accounts Receivable and Other Assets
    30  
Note 13 — Servicing Activities
    30  
Note 14 — Sale and Securitization of Mortgage Loans
    33  
Note 15 — Servicing Related Matters
    34  
Note 16 — Other Real Estate Owned
    34  
Note 17 — Deposits
    34  
Note 18 — Securities Sold Under Agreements to Repurchase
    35  
Note 19 — Advances from FHLB
    36  
Note 20 — Loans Payable
    37  
Note 21 — Notes Payable
    38  
Note 22 — Income Taxes
    38  
Note 23 — Guarantees
    43  
Note 24 — Financial Instruments with Off-Balance Sheet Risk
    44  
Note 25 — Commitments and Contingencies
    45  
Note 26 — Stock Options and Other Incentive Plans
    45  
Note 27 — Earnings (Losses) per Share
    47  
Note 28 — Fair Value of Assets and Liabilities
    48  
Note 29 — Derivatives
    56  
Note 30 — Variable Interest Entities
    59  
Note 31 — Segment Information
    61  
Note 32 — Subsequent Events
    65  
The accompanying notes are an integral part of these financial statements.

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1. Nature of Operations and Basis of Presentation
Doral Financial Corporation (“Doral,” “Doral Financial” or the “Company”) is a bank holding company engaged in banking (including thrift operations), mortgage banking and insurance agency activities through its wholly-owned subsidiaries Doral Bank (“Doral Bank PR”), Doral Bank, FSB (“Doral Bank US”), a federal savings bank in New York and since 2010 in the northwest region of Florida, Doral Insurance Agency, Inc. (“Doral Insurance Agency”), and Doral Properties, Inc. (“Doral Properties”). Doral Bank PR operates three wholly-owned subsidiaries, Doral Mortgage, LLC (“Doral Mortgage”), Doral Money, Inc. (“Doral Money”), engaged in commercial lending in the New York metropolitan area, and CB, LLC, an entity formed to dispose of a real estate project of which Doral Bank PR took possession during 2005. Doral Money consolidates two variable interest entities created for the purpose of entering into a collateralized loan arrangement with a third party.
Doral Investment International, LLC (“Doral Investment”) was organized during 2008 to become a subsidiary of Doral Bank PR, but is not operational.
The accompanying Consolidated Financial Statements (unaudited) have been prepared in conformity with the accounting policies stated in the Company’s Annual Audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. Certain information and note disclosure normally included in the financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted from these statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, accordingly, these financial statements should be read in conjunction with the audited Consolidated Financial Statements of the Company for the year ended December 31, 2010 included in the Company’s 2010 Annual Report on Form 10-K. All adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the results for the interim periods have been reflected. All significant intercompany accounts and transactions have been eliminated in consolidation.
Certain amounts reflected in the 2010 Consolidated Financial Statements have been reclassified to conform with the presentation for 2011.
The results of operations for the quarter and six month period ended June 30, 2011 are not necessarily indicative of the results to be expected for the full year.
2. Recent Accounting Pronouncements
     Accounting Standards Update No. 2011-5 Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU No. 2011-5”). In June 2011, FASB issued ASU No. 2011-5 to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. In addition, this amendment requires all changes in items not related to owners in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two statement approach, the first statement shall present total net income and its components followed by a second statement presenting total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The purpose of this update is to increase prominence of items reported in other comprehensive income. The provisions of ASU No. 2011-5 should be applied retrospectively and are effective for the Company during interim and annual periods beginning after December 15, 2011. The adoption of this ASU will not impact the Company’s financial position or results of operations.
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU No. 2011-4”). In May 2011, the FASB issued ASU No. 2011-4 to amend fair value disclosure requirements in order to achieve common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Some of the amendments clarify the application of existing fair value measurement requirements while other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments clarify the application of the highest and best use and valuation premise concepts, measuring the fair value of financial instruments that are managed within a portfolio and application of premiums and discounts in a fair value measurement. The amendments additionally prescribe enhanced financial statement disclosures for Level 3 fair value measurements. The provisions of ASU No. 2011-4 are effective for the Company during interim and annual periods beginning after December 15, 2011. The Company is evaluating the potential impact, if any, that the adoption of this ASU will have on its financial position and results of operations.
Accounting Standards Update No. 2011-03 — Transfers and Servicing (Topic 860). In April 2011, the FASB issued ASU No. 2011-03, to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity.

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The amendments in this Update remove from the assessment of effective control (i) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (ii) the collateral maintenance implementation guidance related to that criterion. Other criteria applicable to the assessment of effective control are not changed by the amendments in this Update. Those criteria indicate that the transferor is considered to have maintained effective control over the financial assets transferred (and thus must account for the transaction as a secured borrowing) for agreements that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity if all of the following conditions are met:
  1.   The financial assets to be repurchased or redeemed are the same or substantially the same as those transferred.
 
  2.   The agreement is to repurchase or redeem them before maturity, at a fixed or determinable price.
 
  3.   The agreement is entered into contemporaneously with, or in contemplation of, the transfer.
The guidance in this Update is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. Management does not expect the implementation of this standard to have a material effect on the financial statements.
Changes in Accounting Standards Adopted in the Financial Statements
Accounting Standards Update No. 2011-02—Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. On April 4, 2011, the FASB issued ASU No. 2011-02, which amends guidance for evaluating whether the restructuring of a receivable by a creditor is a troubled debt restructuring (TDR). In addition, disclosures required by paragraphs 310-10-50-33 through 50-34, which were deferred by ASU No. 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20 are effective for interim and annual periods beginning on or after June 15, 2011.
The amendments in this update are effective for the first interim or annual period beginning on or after June 15, 2011, and require applying retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. An entity should disclose the total amount of receivables and the allowance for credit losses as of the end of the period of adoption related to those receivables that are newly considered impaired under Section 310-10-35 for which impairment was previously measured under Subtopic 450-20, Contingencies-Loss Contingencies. This ASU was adopted by the Company in its financial statement disclosures with no impact on the financial statements.
Accounting Standards Update No. 2010-29 Business Combinations (Topic 805): Disclosures of Supplementary Pro Forma Information for Business Combinations (a consensus of the FASB Emerging Issues Task Force). In December 2010, FASB issued ASU No. 2010-29 to address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The amendments in this update clarify the acquisition date that should be used for reporting the pro forma financial information disclosures in Topic 805 when comparative financial statements are presented. The amendments also improve the usefulness of the pro forma revenue and earnings disclosures by requiring a description of the nature and amount of material, nonrecurring pro forma adjustments that are directly attributable to the business combination(s).
The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. This ASU was adopted by the Company with no impact on the financial statements.
Accounting Standards Update No. 2010-28 Intangibles-Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force). In December 2010, FASB issued ASU No. 2010-28 to address questions about entities with reporting units with zero or negative carrying amounts because some entities concluded that Step 1 of the test is passed in those circumstances because the fair value of their reporting unit will generally be greater than zero. As a result of that conclusion, some constituents raised concerns that Step 2 of the test is not performed despite factors indicating that goodwill may be impaired. The amendments in this Update modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples in paragraph 350-20-35-30, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

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For public entities, the amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. Upon adoption of the amendments, an entity with reporting units that have carrying amounts that are zero or negative is required to assess whether it is more likely than not that the reporting units’ goodwill is impaired. If the entity determines that it is more likely than not that the goodwill of one or more of its reporting units is impaired, the entity should perform Step 2 of the goodwill impairment test for those reporting unit(s). Any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of adoption. Any goodwill impairments occurring after the initial adoption of the amendments should be included in earnings as required by Section 350-20-35. This ASU was adopted by the Company with no significant impact on the financial statements.
Accounting Standards Update No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (“ASU No. 2010-20”). This ASU requires new disclosures and clarifies existing disclosure requirements about an entity’s allowance for credit losses and credit quality of its financing receivables. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting, as well as clarify the requirements of existing disclosures. ASU 2010-20 is effective the first fiscal quarter ending after December 15, 2010, except for certain disclosure requirements about activity that occurs during a reporting period which are effective the first fiscal quarter beginning after December 15, 2010. This ASU was adopted by the Company and is reflected in the enhanced disclosures in the financial statements.
3. Cash and due from banks
At June 30, 2011 and December 31, 2010, the Company’s cash amounted to $562.4 million and $355.8 million, respectively, which includes non-interest bearing deposits with other banks amounting to $1.6 million and $10.4 million, respectively. The Company’s cash balances included interest bearing balances with the Federal Reserve of $522.1 million and $218.9 million, respectively, and with the Federal Home Loan Bank of $4.3 million and $92.0 million, respectively.
The Company’s bank subsidiaries are required by federal and state regulatory agencies to maintain average reserve balances with the Federal Reserve Bank or other banks. Those required average reserve balances were $146.2 million and $115.9 million as of June 30, 2011 and December 31, 2010, respectively.
As of June 30, 2011 and December 31, 2010, cash and due from banks included $0.9 million and $2.6 million, respectively, that is considered restricted cash.
4. Other Interest-Earning Assets
At June 30, 2011 and December 31, 2010, the Company’s other interest-earning assets totaled $44.0 million and $156.6 million, respectively. Other interest-earning assets includes money market investments, securities purchased under agreements to resell, cash pledged with counterparties to back the Company’s securities sold under agreements to repurchase and/or derivatives positions, among others.
As of June 30, 2011 and December 31, 2010, other interest-earning assets included $19.0 million and $126.6 million, respectively, that was considered restricted other interest-earning assets.

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5. Securities Held for Trading
The following table summarizes the fair value of Doral Financial’s securities held for trading as of June 30, 2011 and December 31, 2010.
                 
(In thousands)   June 30, 2011     December 31, 2010  
Mortgage-Backed Securities
  $ 830     $ 766  
Variable Rate IOs
    43,552       44,018  
Fixed Rate IOs
    198       232  
Derivatives (1)
    9       13  
 
           
Total
  $ 44,589     $ 45,029  
 
           
 
(1)   Doral Financial uses derivatives to manage its exposure to interest rate risk caused by changes in interest rates. Derivatives include interest rate caps and forward contracts. Doral Financial’s general policy is to account for derivatives on a mark-to-market basis with gains or losses charged to operations as they occur. Derivatives not accounted for as hedges in a net asset position are recorded as securities held for trading, and derivatives in a net liability position are reported as liabilities. The gross notional amount of derivatives recorded as held for trading totaled $265.0 million as of June 30, 2011 and $310.0 million as of December 31, 2010. Notional amounts indicate the volume of derivatives activity, but do not represent Doral Financial’s exposure to market or credit risk.
The weighted-average yield is computed based on amortized cost and, therefore, does not give effect to changes in fair value. As of June 30, 2011 and December 31, 2010 weighted-average yield, including IOs, was 13.48% and 13.38%, respectively.

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6. Securities Available for Sale
The following tables summarize the amortized cost, gross unrealized gains and losses, approximate fair value, weighted-average yield and contractual maturities of securities available for sale as of June 30, 2011 and December 31, 2010.
The weighted-average yield is computed based on amortized cost and, therefore, does not give effect to changes in fair value. Expected maturities of mortgage-backed securities and certain debt securities might differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
As of June 30, 2011
                                         
                                    Weighted-  
    Amortized     Unrealized     Unrealized     Fair     Average  
(Dollars in thousands)   Cost     Gains     Losses     Value     Yield  
Agency MBS
                                       
Due within one year
  $ 7     $     $     $ 7       6.60 %
Due from one to five years
    195       9             204       4.84 %
Due from five to ten years
    68,166       1,501             69,667       2.74 %
Due over ten years
    372,161       5,114       197       377,078       3.18 %
 
                                       
CMO Government Sponsored Agencies
                                       
Due from five to ten years
    7,116       46       140       7,022       4.85 %
Due over ten years
    100,723       2,115       230       102,608       3.62 %
 
                                       
Non-Agency CMOs
                                       
Due over ten years
    11,153             3,193       7,960       17.35 %
 
                                       
Obligations U.S. Government Sponsored Agencies
                                       
Due within one year
    94,947       35             94,982       0.18 %
 
                                       
Other
                                       
Due from one to five years
    5,002             1       5,001       3.45 %
Due over ten years
    7,843       10       931       6,922       4.19 %
 
                             
 
  $ 667,313     $ 8,830     $ 4,692     $ 671,451       3.05 %
 
                             

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As of December 31, 2010
                                         
                                    Weighted-  
    Amortized     Unrealized     Unrealized     Fair     Average  
(Dollars in thousands)   Cost     Gains     Losses     Value     Yield  
Agency MBS
                                       
Due within one year
  $ 36     $ 1     $     $ 37       6.67 %
Due from one to five years
    220       11             231       4.87 %
Due from five to ten years
    416,709       3,447       130       420,026       2.47 %
Due over ten years
    718,690       4,949       960       722,679       2.57 %
 
                                       
CMO Government Sponsored Agencies
                                       
Due from five to ten years
    17,953       122       178       17,897       4.10 %
Due over ten years
    288,414       6,750       230       294,934       3.57 %
 
                                       
Non-Agency CMOs
                                       
Due over ten years
    11,108             3,916       7,192       19.74 %
 
                                       
Obligations U.S. Government Sponsored Agencies
                                       
Due within one year
    34,987       5             34,992       0.16 %
 
                                       
Other
                                       
Due over ten years
    8,203             1,126       7,077       4.25 %
 
                             
 
  $ 1,496,320     $ 15,285     $ 6,540     $ 1,505,065       2.83 %
 
                             

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7. Investments in an Unrealized Loss Position
The following tables show Doral Financial’s gross unrealized losses and fair value for available for sale investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2011 and December 31, 2010:
Securities Available for Sale
                                                                         
    As of June 30, 2011  
    Less than 12 months     12 months or more     Total  
    Number                     Number                     Number                
    of             Unrealized     of             Unrealized     of             Unrealized  
(Dollars in thousands)   Positions     Fair Value     Losses     Positions     Fair Value     Losses     Positions     Fair Value     Losses  
Agency MBS
    1     $ 16,244     $ 197           $     $       1     $ 16,244     $ 197  
CMO Government Sponsored Agencies
    1       3,538       230       1       1,554       140       2       5,092       370  
Non-Agency CMOs
                      3       7,960       3,193       3       7,960       3,193  
Other
    1       5,001       1       1       2,069       931       2       7,070       932  
 
                                                     
 
    3     $ 24,783     $ 428       5     $ 11,583     $ 4,264       8     $ 36,366     $ 4,692  
 
                                                     
Securities Available for Sale
                                                                         
    As of December 31, 2010  
    Less than 12 months     12 months or more     Total  
    Number                     Number                     Number                
    of             Unrealized     of             Unrealized     of             Unrealized  
(Dollars in thousands)   Positions     Fair Value     Losses     Positions     Fair Value     Losses     Positions     Fair Value     Losses  
Agency MBS
    13     $ 241,675     $ 1,090           $     $       13     $ 241,675     $ 1,090  
CMO Government Sponsored Agencies
    2       11,564       255       1       1,704       153       3       13,268       408  
Non-Agency CMOs
                      3       7,192       3,916       3       7,192       3,916  
Other
    1       5,162       41       1       1,915       1,085       2       7,077       1,126  
 
                                                     
 
    16     $ 258,401     $ 1,386       5     $ 10,811     $ 5,154       21     $ 269,212     $ 6,540  
 
                                                     
The securities held by the Company are principally MBS or securities backed by a U.S. government sponsored entity and therefore, principal and interest on the securities are considered recoverable. Doral Financial’s investment portfolio consists primarily of AAA rated debt securities, except for the Non-Agency Collateralized Mortgage Obligations (“CMO”), which are non-investment grade.
The Company assesses whether a security is other than temporarily impaired (“OTTI”) whenever the fair value of an investment security is less than its amortized cost basis at the balance sheet date. Amortized cost basis includes adjustments made to the cost of a security for accretion, amortization, collection of cash, previous OTTI recognized into earnings (less any cumulative effect adjustments) and fair value hedge accounting adjustments. OTTI is considered to have occurred under the following circumstances:
  If the Company intends to sell the investment security and its fair value is less than its amortized cost.
  If, based on available evidence, it is more likely than not that the Company will decide or be required to sell the investment security before the recovery of its amortized cost basis.
  If the Company does not expect to recover the entire amortized cost basis of the investment security. This occurs when the present value of cash flows expected to be collected is less than the amortized cost basis of the security. In determining whether a credit loss exists, the Company uses its best estimate of the present value of cash flows expected to be collected from the investment security. Cash flows expected to be collected are estimated based on a careful assessment of all available information. The amount of estimated credit loss is determined as the amount by which the amortized cost basis exceeds the present value of expected cash flows.

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The Company evaluates its individual available for sale investment securities for OTTI on at least a quarterly basis. As part of this process, the Company considers its intent to sell each investment security and whether it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of these conditions is met, the Company recognizes an OTTI charge to earnings equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. For securities that meet neither of these conditions, an analysis is performed to determine if any of these securities are at risk for OTTI. To determine which securities are at risk for OTTI and should be quantitatively evaluated utilizing a detailed cash flow analysis, the Company evaluates certain indicators which consider various characteristics of each security including, but not limited to, the following: the credit rating and related outlook or status of the securities; the creditworthiness of the issuers of the securities; the value and type of underlying collateral; the duration and level of the unrealized loss; any credit enhancements; and other collateral-related characteristics such as the ratio of credit enhancements to expected credit losses. The relative importance of this information varies based on the facts and circumstances surrounding each security, as well as the economic environment at the time of assessment. The amount of estimated credit loss, which is charged to earnings, is determined as the amount by which the amortized cost basis exceeds the present value of expected cash flows.
As a result of its review of the portfolio as of June 30, 2011, the Company performed a detailed cash flow analysis of certain securities in unrealized loss to assess whether they were OTTI. The Company uses a third party provider to generate cash flow forecasts of each security reviewed based on a combination of management and market driven assumptions and securitization terms, including remaining payment terms of the security, prepayment speeds, the estimated amount of loans to become seriously delinquent over the life of the security, the estimated life-time severity rate, estimated losses over the life of the security, loan characteristics, the level of subordination within the security structure, expected housing price changes and interest rate assumptions. During the six month period ended June 30, 2011 an OTTI adjustment of $0.1 million was recognized on securities from the P.R. Non-Agency CMO portfolio with an amortized cost of $2.8 million. It is possible that future loss assumptions could change and cause future OTTI charges in these securities.
Higher default and loss assumptions driven by higher delinquencies in Puerto Rico, primarily due to the impact of inflationary pressures on the consumer, the high rate of unemployment and general recessionary condition on the Island, has resulted in higher default and loss estimates on the P.R. Non-Agency CMOs bonds. The higher default and loss estimates have resulted in lower bond prices and higher levels of unrealized losses on the bonds.
During the quarter ended March 31, 2010, it was determined that six securities reflected OTTI. Five of these securities are subordinated interests in a securitization structure collateralized by option adjustable rate mortgage (“ARM”) loans. The characteristics of these six securities that led to the OTTI conclusion included: i) the cumulative level and estimated future delinquency levels, ii) the effect of severely delinquent loans on forecasted defaults, iii) the cumulative severity and expected severity in resolving the defaulted loans, and iv) the current subordination of the securities that resulted in the present value of the forecast cash flows being less than the cost basis of the security. Management estimated that credit losses of $13.3 million had been incurred on these securities with an amortized cost of $313.9 million as of March 31, 2010.
In April 2010, the Company was approved by the Federal Deposit Insurance Corporation (the “FDIC”) to bid for the assets and liabilities of certain Puerto Rico domiciled banks. As a condition to bid, the Company was required by the federal bank regulatory agencies to comply with certain financial ratios. To comply with the prescribed ratios, the Company could take a number of alternative actions including raising additional capital, disposing of non-performing loans, disposing of certain non-agency securities, shrinking the Company, or a combination of the preceding. On April 23, 2010, the Company sold the five securities mentioned above and recognized a loss of $136.7 million, of which $129.7 million had previously been reflected in other comprehensive income (loss). If the Company were not bidding for the assets and liabilities of certain failed banks, the Company would not have elected to sell the non-agency securities as it had the positive intent and the ability to hold the securities to maturity or until principal recovered.
As of June 30, 2011, the Company did not intend to sell the securities which were evaluated for OTTI and concluded it was not more likely than not that it would be required to sell these securities before the anticipated recovery of each security’s remaining amortized cost basis. Therefore, the difference between the amortized cost basis and the market value of the securities is recorded in accumulated other comprehensive income.
For the remainder of the Company’s securities portfolio that have experienced decreases in the fair value, the decline is considered to be temporary as the Company expects to recover the entire amortized cost basis on the securities and neither intends to sell these securities nor is it more likely than not that it will be required to sell these securities.
In subsequent periods the Company will account for the securities judged to be OTTI as if the securities had been purchased at the previous amortized cost less the credit related OTTI. Once a credit loss is recognized, the investment will be adjusted to a new amortized cost basis equal to the previous amortized cost basis less the amount recognized in earnings. For the investment securities for which OTTI was recognized in earnings, the difference between the new amortized cost basis and the cash flows

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expected to be collected will be accreted as interest income.
The following table presents the securities for which an OTTI was recognized based on the Company’s impairment analysis of its investment portfolio at June 30, 2011 and 2010:
                                                                         
    As of     Quarter Ended     Six Month Period Ended  
    June 30, 2011     June 30, 2011     June 30, 2011  
    Amortized                                                        
    Cost (after     Gross                     OTTI Related     Total             OTTI Related     Total  
    credit related     Unrealized             OTTI Related     to Non-Credit     Impairment     OTTI Related     to Non-Credit     Impairment  
(In thousands)   OTTI)     Losses     Fair Value     to Credit Loss     Loss     Losses     to Credit Loss     Loss     Losses  
OTTI Investments
                                                                       
U.S. Non-Agency CMOs
  $     $     $     $     $     $     $     $     $  
P.R. Non-Agency CMOs
    11,153       3,193       7,960       86       325       411       86       325       411  
 
                                                     
 
                                                                       
 
  $ 11,153     $ 3,193     $ 7,960     $ 86     $ 325     $ 411     $ 86     $ 325     $ 411  
 
                                                     
                                                                         
    As of     Quarter Ended     Six Month Period Ended  
    June 30, 2010     June 30, 2010     June 30, 2010  
    Amortized                                                        
    Cost (after     Gross                     OTTI Related     Total             OTTI Related     Total  
    credit related     Unrealized             OTTI Related     to Non-Credit     Impairment     OTTI Related     to Non-Credit     Impairment  
(In thousands)   OTTI)     Losses     Fair Value     to Credit Loss     Loss     Losses     to Credit Loss     Loss     Losses  
OTTI Investments
                                                                       
U.S. Non-Agency CMOs
  $     $     $     $     $     $     $ 13,257     $ 26,840     $ 40,097  
P.R. Non-Agency CMOs
    8,156       3,629       4,527                         2       96       98  
 
                                                     
 
                                                                       
 
  $ 8,156     $ 3,629     $ 4,527     $     $     $     $ 13,259     $ 26,936     $ 40,195  
 
                                                     
The following table presents activity related to the credit losses recognized in earnings on debt securities held by the Company for which a portion of OTTI remains in accumulated other comprehensive income:
                                 
    Quarters Ended     Six Month Periods Ended  
    June 30,     June 30,  
(In thousands)   2011     2010     2011     2010  
Balance at beginning of period
  $ 2,816     $ 1,193     $ 2,816     $ 1,191  
Additions:
                               
Credit losses for which OTTI was not previously recognized
                       
Additional OTTI credit losses for which an other-than-temporary charge was previously recognized
    86             86       2  
 
                       
Balance at end of period
  $ 2,902     $ 1,193     $ 2,902     $ 1,193  
 
                       
The Company will continue to monitor and analyze the performance of its securities to assess the collectability of principal and interest as of each balance sheet date. As conditions in the housing and mortgage markets continue to change over time, the amount of projected credit losses could also change. Valuation and OTTI determinations will continue to be affected by external market factors including default rates, severity rates, and macro-economic factors in the United States and Puerto Rico. Doral Financial’s future results may be materially affected by worsening defaults and severity rates related to the underlying collateral.

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8. Pledged Assets
At June 30, 2011 and December 31, 2010, certain securities and loans, as well as cash and other interest-earning assets, were pledged to secure public and trust deposits, assets sold under agreements to repurchase, other borrowings and credit facilities available.
                 
(In thousands)   June 30, 2011     December 31, 2010  
Cash
  $ 890     $ 2,642  
Other interest-earning assets
    18,967       126,573  
Securities available for sale
    631,257       1,458,992  
Loans held for sale
    119,729       121,988  
Loans receivable
    2,344,012       2,388,428  
 
           
Total pledged assets
  $ 3,114,855     $ 4,098,623  
 
           
9. Loans Held for Sale and Loans Receivable
Loans held for sale consist of the following:
                 
(In thousands)   June 30, 2011     December 31, 2010  
Conventional single family residential (1)
  $ 110,524     $ 119,290  
FHA/VA
    165,176       172,216  
Commercial loans to financial institutions
    13,598       14,608  
Commercial real estate
    12,636       13,155  
 
           
Total loans held for sale (2)(3)
  $ 301,934     $ 319,269  
 
           
 
(1)   At both June 30, 2011 and December 31, 2010, includes $0.1 million related to U.S. subsidiaries’ loans.
 
(2)   At both, June 30, 2011 and December 31, 2010, the loans held for sale portfolio include $1.1 million of interest-only loans.
 
(3)   Includes $19.6 million and $21.4 million of balloon loans, as of June 30, 2011 and December 31, 2010, respectively.
At June 30, 2011 and December 31, 2010, the loans held for sale portfolio included $148.1 million and $153.4 million, respectively, of defaulted loans collateralizing Ginnie Mae (“GNMA”) securities for which the Company has an unconditional option (but not an obligation) to repurchase the defaulted loans. Payment of principal and a portion of the interest on these loans is guaranteed by the Federal Housing Administration (“FHA”).
As of June 30, 2011 and December 31, 2010, the Company had a net deferred origination fee on loans held for sale amounting to approximately $1.0 million and $0.7 million, respectively.
Non-performing loans held for sale totaled $2.5 million and $2.7 million as of June 30, 2011 and December 31, 2010, respectively.
Doral’s exposure to credit risk associated with its lending activities is measured on a customer basis as well as by groups of customers that share similar attributes. In the normal course of business, the Company has a concentration of loan credit risk in Puerto Rico and the mainland U.S., with the preponderance of its loans held for investment credit exposure in Puerto Rico.

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The table below presents the Company’s loans receivable by product and geographic location:
                                                 
    June 30, 2011     December 31, 2010  
    PR     US     Total     PR     US     Total  
Residential mortgage (1)
  $ 3,406,704     $ 131,200     $ 3,537,904     $ 3,451,895     $ 108,641     $ 3,560,536  
FHA/VA guaranteed residential mortgage
    132,657             132,657       187,473             187,473  
Consumer Loans
    46,324       31       46,355       54,354       26       54,380  
Lease financing receivables
    2,762             2,762       4,807             4,807  
 
                                   
Total consumer
    3,588,447       131,231       3,719,678       3,698,529       108,667       3,807,196  
 
                                               
Commercial real estate
    597,954       68,626       666,580       629,043       59,903       688,946  
Commercial and industrial
    38,384       874,036       912,420       36,639       597,056       633,695  
Construction and land
    309,590       80,330       389,920       349,899       108,835       458,734  
 
                                   
Total commercial
    945,928       1,022,992       1,968,920       1,015,581       765,794       1,781,375  
 
                                               
Loans receivable, gross (2)
    4,534,375       1,154,223       5,688,598       4,714,110       874,461       5,588,571  
 
                                   
 
                                               
Allowance for loan and lease losses
    (87,592 )     (5,880 )     (93,472 )     (117,821 )     (5,831 )     (123,652 )
 
                                   
 
  $ 4,446,783     $ 1,148,343     $ 5,595,126     $ 4,596,289     $ 868,630     $ 5,464,919  
 
                                   
 
(1)   Includes $576.5 million and $565.9 million of balloon loans, as of June 30, 2011 and December 31, 2010, respectively.
 
(2)   Includes $405.8 million and $442.6 million of interest-only loans, as of June 30, 2011 and December 31, 2010, respectively.
As of June 30, 2011 and December 31, 2010, the Company had a net deferred origination fee on loans held for investment amounting to approximately $23.8 million and $24.0 million, respectively.
The Company has not traditionally made variable interest rate residential mortgage loans, option adjustable rate mortgages, or many of the higher risk mortgage loans made by a number of U.S. mainland banks. However, as part of its loss mitigation programs, the Company has granted certain concessions to borrowers in financial difficulties that have proven payment capacity which may include interest only periods or temporary interest rate reductions. Loans with temporarily reduced principal and interest payments may be subject to significant increases in loan payments as the temporary payment periods end which may lead to higher level of re-defaults. Doral works with the borrowers to establish terms and conditions (prior to the payment date) in order to optimize the Company’s interests.
Non-accrual and Past Due Loans and Leases
Doral recognizes interest income on loans receivable on an accrual basis unless it is determined that collection of all contractual principal or interest is unlikely. Doral discontinues recognition of interest income, when a loan receivable is delinquent on principal or interest for more than 90 days, except for revolving lines of credit and credit cards (non-accrual at 180 days), mortgage loans insured by FHA/VA (non-accrual at 270 days), and certain loans determined to be well collateralized so that ultimate collection of principal and interest is not in question (for example, when the outstanding loan and interest balance as a percentage of current collateral value is less than 60%). When a loan is placed on non-accrual, all accrued but unpaid interest is reversed against interest income in that period. Loans return to accrual status when principal and interest are current under the terms of the loan agreement, or when the loan is both well-secured and in the process of collection and collectability is no longer doubtful. In the case of loans under troubled debt restructuring agreements, the Company continues to place the loans in non-accrual status and reports the loans as non-performing loans unless the Company expects to collect all contractual principal and interest and the loans have proven repayment capacity for a sufficient amount of time. Previously reversed or not accrued interest will be credited to income in the period of recovery. Interest income is recognized when a payment is received on a non-accrual loan if ultimate collection of principal is not in doubt.
Accrued interest receivable on impaired loans is reversed when a loan is placed on non-accrual status. Interest collections on non-accruing loans, for which the ultimate collectability of principal is uncertain, are applied as principal reductions; otherwise, such collections are credited to interest income when received. These loans may be restored to accrual status when all principal and interest is current and full repayment of the remaining contractual principal and interest is expected, or when the loan otherwise becomes well-secured and is in the process of collection. Loans whose contractual terms have been modified in a TDR and are

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current at the time of restructuring remain on accrual status if there is demonstrated performance prior to the restructuring and payment in full under the restructured terms is expected. Otherwise, the loans are placed on non-accrual status and reported as non-performing until there is sustained repayment performance for a reasonable period.
For consumer loans (primarily residential real estate), all of Doral’s loss mitigation tools require that the borrower demonstrate the intent and ability to pay all principal and interest on the loan. Doral must receive at least three consecutive monthly payments prior to qualifying the borrower for a loss mitigation product. Doral’s loss mitigation specialists must be reasonably assured of the borrower’s future repayment and performance from their review of the borrower’s circumstances, and when all the conditions are met, the customer is approved for a loss mitigation product, placed on a probation period and the loan is returned to accrual status. On a monthly basis Doral reviews the loan to ensure that payments are made during the probationary period. If a payment is not made during this probationary period the loan is immediately returned to non-accrual status. Also, if a payment is missed during the probationary period, the loan reverts to its original terms, and collections/foreclosure procedures begin from the point at which they stood prior to the restructure. Consumer loans not delinquent 90 days or more that are eligible for loss mitigation products are subject to the same requirements as the delinquent consumer loans, except that the requirement of making three consecutive payments prior to the restructure is waived.
For commercial loan loss mitigation (which includes commercial real estate, commercial and industrial and construction and land loans), the loans are underwritten by the Collections function, the intent and ability of the borrower to service the debt under the revised terms is studied, and if approved for the troubled debt restructuring, the customer is placed on a six month probationary period during which the customer is required to make six consecutive payments (or the equivalent in a lump sum) before the loan is returned to accrual status.
Loans receivable on which accrual of interest income had been discontinued as of June 30, 2011 and December 31, 2010 were as follows:
                                                 
    June 30, 2011     December 31, 2010  
(In thousands)   PR     US     Total     PR     US     Total  
Consumer
                                               
Residential mortgage
  $ 277,501     $ 685     $ 278,186     $ 276,328     $ 2,030     $ 278,358  
Lease financing receivables
    199             199       415             415  
Other consumer (1)
    500             500       404             404  
 
                                   
Total consumer
    278,200       685       278,885       277,147       2,030       279,177  
 
                                               
Commercial
                                               
Commercial real estate
    167,138             167,138       193,348             193,348  
Construction and land
    107,516       1,610       109,126       147,127       1,610       148,737  
Commercial and industrial
    2,731             2,731       2,522             2,522  
 
                                   
Total commercial
    277,385       1,610       278,995       342,997       1,610       344,607  
 
                                   
 
                                               
Total loans receivable on which accrual of interest had been discontinued(2)(3)
  $ 555,585     $ 2,295     $ 557,880     $ 620,144     $ 3,640     $ 623,784  
 
                                   
 
(1)   Includes personal, revolving lines of credit and other consumer loans.
 
(2)   Excludes $2.5 million and $2.7 million in loans held for sale on which accrual of interest had been discontinued as of June 30, 2011 and December 31, 2010, respectively.
 
(3)   Excludes $79.1 million and $121.3 million of non-performing FHA/VA guaranteed loans that, due to the nature of their guarantees, present minimal credit risk to the Company as of June 30, 2011 and December 31, 2010, respectively.

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Doral’s aging of past due loan receivables as of June 30, 2011 and December 31, 2010 were as follows:
As of June 30, 2011
                                                                                                 
                                                                                            Recorded  
                                                                                            Investment  
    30 to 89 Days     90 to 179 Days     180 to 240 Days     Over 240 Days                             > 90 Days  
    Past Due (1)     Past Due     Past Due     Past Due     Total Past Due     Total Past     and Still  
(In thousands)   PR     US     PR     US     PR     US     PR     US     PR     US     Due     Accruing  
Consumer
                                                                                               
Residential mortgage (2)
  $ 84,433     $     $ 86,342     $     $ 25,432     $     $ 165,727     $ 98     $ 361,934     $ 98     $ 362,032     $  
Lease financing receivables
    219             199                                     418             418        
Other consumer
    804             2,452             91             71             3,418             3,418       1,961  
 
                                                                       
Total consumer
    85,456             88,993             25,523             165,798       98       365,770       98       365,868       1,961  
 
                                                                                               
Commercial
                                                                                               
Commercial real estate
    35,057             63,690             5,789             97,659             202,195             202,195        
Construction and land
    3,235             4,121             634             102,761       1,610       110,751       1,610       112,361        
Commercial and industrial
    366             618             807             1,960             3,751             3,751       560  
 
                                                                       
Total commercial
    38,658             68,429             7,230             202,380       1,610       316,697       1,610       318,307       560  
 
                                                                       
 
                                                                                               
Total past due loans
  $ 124,114     $     $ 157,422     $     $ 32,753     $     $ 368,178     $ 1,708     $ 682,467     $ 1,708     $ 684,175     $ 2,521  
 
                                                                       
 
(1)   In accordance with regulatory guidance, Doral defines 30 days past due as when the borrower is delinquent two payments. Doral defines 90 days past due based upon the actual number of days past due.
 
(2)   As of June 30, 2011 excludes $96.0 million of non-performing FHA/VA guaranteed loans that due to the nature of their guarantees present minimal credit risk to the Company.
As of December 31, 2010
                                                                                                 
                                                                                            Recorded  
                                                                                            Investment  
    30 to 89 Days     90 to 179 Days     180 to 240 Days     Over 240 Days                             > 90 Days  
    Past Due(1)     Past Due     Past Due     Past Due     Total Past Due     Total Past     and Still  
(In thousands)   PR     US     PR     US     PR     US     PR     US     PR     US     Due     Accruing  
Consumer
                                                                                               
Residential mortgage(2)
  $ 68,361     $     $ 55,947     $ 1,624     $ 19,379     $     $ 196,181     $ 409     $ 339,868     $ 2,033     $ 341,901     $  
Lease financing receivables
    234             386                                     620             620        
Other consumer
    1,341             400                         4             1,745             1,745       1,993  
 
                                                                       
Total consumer
    69,936             56,733       1,624       19,379             196,185       409       342,233       2,033       344,266       1,993  
 
                                                                                               
Commercial
                                                                                               
Commercial real estate
    35,202             65,484             6,962             120,231             227,879             227,879        
Construction and land
    3,901             284             325             1,916       1,610       6,426       1,610       8,036       560  
Commercial and industrial
    2,281             8,135             395             138,144             148,955             148,955        
 
                                                                       
Total commercial
    41,384             73,903             7,682             260,291       1,610       383,260       1,610       384,870       560  
 
                                                                       
Total past due loans
  $ 111,320     $     $ 130,636     $ 1,624     $ 27,061     $     $ 456,476     $ 2,019     $ 725,493     $ 3,643     $ 729,136     $ 2,553  
 
                                                                       
 
(1)   In accordance with regulatory guidance, Doral defines 30 days past due as when the borrower is delinquent two payments. Doral defines 90 days past due based upon the actual number of days past due.
 
(2)   As of December 31, 2010 excludes $160.0 million of total past due FHA/VA guaranteed loans that due to the nature of their guarantees present minimal credit risk to the Company.

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The Company would have recognized additional income had all delinquent loans been accounted for on an accrual basis as follows:
                                 
    Quarters Ended June 30,     Six Months Period Ended June 30,  
(In thousands)   2011     2010     2011     2010  
Consumer
                               
Residential mortgage (1)(2)
  $ 5,865     $ 6,577     $ 9,484     $ 10,985  
Other consumer
    18       31       18       31  
 
                       
Total consumer
    5,883       6,608       9,502       11,016  
 
                               
Commercial
                               
Commercial real estate
    3,477       3,292       6,108       5,774  
Commercial and industrial
    254       88       471       116  
Construction and land
    2,436       4,383       4,790       7,966  
 
                       
Total commercial
    6,167       7,763       11,369       13,856  
 
                       
Total interest income
  $ 12,050     $ 14,371     $ 20,871     $ 24,872  
 
                       
 
(1)   Excludes $1.6 million and $3.7 million in additional interest income the Company would have recognized if FHA/VA non-accrual loans been accounted for on an accrual status for the quarters ended June 30, 2011 and 2010, respectively.
 
(2)   Excludes $3.2 million and $5.8 million in additional interest income the Company would have recognized if FHA/VA non-accrual loans been accounted for on an accrual status for the six months period ended June 30, 2011 and 2010, respectively.
Credit Quality
The Company’s lending activity is its core function and as such the quality and effectiveness of the loan origination and credit risk areas are imperative to its long term success. The Company manages credit risk by maintaining sound underwriting standards, monitoring and evaluating loan portfolio quality (including trends and collectability) and assessing reserves and loan concentrations. Critical risk management responsibilities include establishing sound lending standards, monitoring the quality of the loan portfolio performance, establishing loan rating systems, assessing reserves and loan concentrations, supervising document control and accounting, providing necessary training and resources to credit officers, implementing lending policies and loan documentation procedures, identifying problem loans as early as possible, and instituting procedures to ensure appropriate actions to comply with laws and regulations.
Credit risk management begins with initial underwriting and continues throughout the borrower’s credit cycle. Management’s judgment in conjunction with statistical analysis is used in underwriting, credit decisions, product pricing, risk appetite and setting credit limits, operating processes and metrics to limit the risks inherent in the loan portfolio and returns. Tolerance levels are set to decrease the percentage of approvals as the risk profile of the customer increases. Statistical models are based on detailed behavioral information from external sources such as credit bureaus, external credit scores and/or internal historical experience. These models are an integral part of our credit management process and are used in the assessment of both new and existing credit decisions, portfolio management strategies, collection practices and in the determination of the allowance for loan and lease losses. The Company has also established an internal risk rating system and internal classifications which provide timely identification of potential deterioration in loan quality attributes in the loan portfolio. In addition, the Company has independent Loan Review and Internal Audit departments, each of which conduct monitoring and evaluation of loan portfolio quality, loan administration, and other related activities.
The risks involved in a loan decision are thoroughly analyzed prior to approval. Certain characteristics are indicators of risk, such as loan amount, purpose, product type, property type, loan amount in relation to the borrower’s previous credit experience and loan to value, cash out of the transaction, time of occupancy, and others. Many lending risks can be mitigated by requiring higher levels of borrower equity, risk pricing, additional documentation or collateral or other compensating factors.
The Company follows the established guidelines and requirements for government insured or guaranteed loans such as FHA, VA, Rural and Government subsidies, as well as conforming loans sold to FHLMC and FNMA. The Company also provides conventional loans for borrowers that do not qualify for a conforming loan. Doral’s underwriting policies focus primarily on the borrower’s ability to pay and secondarily on collateral value. The maximum loan to value ratio on conventional first mortgages generally does not exceed 80%. Loans with higher loan to value ratios may require private mortgage insurance.

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Due to the current economic conditions, the Company has limited new lending activities in Puerto Rico in the construction, commercial and consumer (excluding mortgage) markets. The strategy adopted by the Company in relation to its loan exposures is to maintain a strong collection process that will ensure the orderly recovery of all loans by means of its collection efforts or restructuring of the loan. Lending activities in the United States increased in 2010 and continues to increase through the second quarter of June 30, 2011 as management determined that the U.S. market provides sound credit opportunities in select segments and markets. As of June 30, 2011 gross loans receivable in U.S totaled to $1.2 billion showing an increase of $279.8 million compared to December 31, 2010.
Delinquency is the primary indicator of credit quality the Company uses to monitor the credit quality of its portfolios, and is the basis for internal risk rating of loans. Refreshed LTVs and to a lesser extent, FICO scores are also considered in analyzing credit quality. On a daily basis, Doral monitors the delinquency of its loan portfolios and uses this information to calibrate its collection, restructuring and foreclosure targets. Portfolios are managed by different teams with expertise in their assigned tranches. For example, loans are segregated geographically, P.R. vs. U.S.; by product types (residential mortgage, small commercial, consumer, large commercial and construction and land loans); and by delinquency process stages, such as less than 90 days past due, over 90 days past due, loss mitigation, foreclosure and OREO.
For large commercial loans (including commercial real estate, commercial and industrial, construction and land loan portfolios), the Company uses workout agents, collection specialists, attorneys and third party service providers to supplement the management of the portfolio, including the credit quality and loss mitigation alternatives. In the case of residential construction projects, the workout function is primarily handled by a third party servicer that monitors the end-to-end process including, but not limited to, completion of construction, necessary restructuring, pricing, marketing and unit sales. For large commercial and construction loans the initial risk rating is driven by performance and delinquency. On an ongoing basis, the risk rating of large credits is managed by the portfolio management and collections function and reviewed and validated by the loan review function. Due to the current economic environment and management’s perceived increase in risk in the commercial loan portfolio, during the third quarter of 2010, management individually reviewed for impairment all commercial loans over $50,000 that were over 90 days past due to better estimate the amount the company expects to receive. Beginning the fourth quarter of 2010, management individually reviewed all commercial real estate loans over $500,000 that were over 90 days past due, as well as all new loans classified as substandard during the quarter. In future periods, and while management’s assessment of the inherent credit risk in the commercial portfolio continues to be high, the Company will continue to evaluate on a quarterly basis 25% of all commercial loans over 90 days past due and between $50,000 and $500,000 so that in any one year period it would have individually evaluated for impairment 100% of all substandard commercial loans between $50,000 and $500,000, as well as all substandard commercial real estate loans over $500,000 and all substandard commercial and construction loans over $1.0 million. There is a high level of surveillance and monitoring in place to manage these assets and mitigate any loss exposure.
As a result of the economic situation in P.R., Doral has created a number of loan modification programs to help borrowers stay in their homes and operate their businesses which also optimizes borrower performance and returns to Doral (refer to the discussion on loan modifications and troubled debt restructurings below for further information on the programs). Residential, other consumer or commercial loan modifications can result in returning a loan to accrual status when the criteria for doing so are met, resulting in increasing interest income and cash flows as previously non-performing loans begin to perform, and decreases in foreclosure and OREO costs by decreasing the number of foreclosed properties.

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Detailed below is a table of the recorded investment in loans (including FHA/VA loans and loans held for sale) by the delinquency buckets the Company uses to monitor the credit quality of its loans as of June 30, 2011 and December 31, 2010. The aging of the delinquent residential mortgage portfolio in the table below is a result of the prolonged foreclosure process characteristics in Puerto Rico and the Company’s efforts to help customers stay in their homes through various loss mitigation programs.
As of June 30, 2011
                                                                                                             
                    30 to 89 Days     90 to 179 Days     180 to 240 Days     Over 240 Days              
    Current     Past Due     Past Due     Past Due     Past Due     Total        
(In thousands)   PR     US     PR     US     PR     US     PR     US     PR     US     PR     US     Total  
Consumer
                                                                                                       
Residential mortgage
  $ 3,213,187     $ 264,959     $ 92,355     $     $ 98,751     $     $ 32,678     $     $ 243,646     $ 685     $ 3,680,617     $ 265,644     $ 3,946,261  
Lease financing receivables
    2,342             219             201                                     2,762             2,762  
Other consumer
    43,069       31       793             2,316             86             60             46,324       31       46,355  
 
                                                                             
Total consumer
    3,258,598       264,990       93,367             101,268             32,764             243,706       685       3,729,703       265,675       3,995,378  
 
                                                                                                       
Commercial
                                                                                                       
Commercial real estate
    406,122       68,626       35,177             66,460             5,821             97,010             610,590       68,626       679,216  
Commercial and industrial
    48,318       874,036       371             613             803             1,877             51,982       874,036       926,018  
Construction and land
    199,100       78,720       3,237             4,121             632             102,500       1,610       309,590       80,330       389,920  
 
                                                                             
Total commercial
    653,540       1,021,382       38,785             71,194             7,256             201,387       1,610       972,162       1,022,992       1,995,154  
 
                                                                             
 
                                                                                                       
Total
  $ 3,912,138     $ 1,286,372     $ 132,152     $     $ 172,462     $     $ 40,020     $     $ 445,093     $ 2,295     $ 4,701,865     $ 1,288,667     $ 5,990,532  
 
                                                                             
 
                                                                                                       
December 31, 2010
                                                                                                       
 
                                                                                                       
                    30 to 89 Days     90 to 179 Days     180 to 240 Days     Over 240 Days              
    Current     Past Due     Past Due     Past Due     Past Due     Total        
(In thousands)   PR     US     PR     US     PR     US     PR     US     PR     US     PR     US     Total  
Consumer
                                                                                                       
Residential mortgage
  $ 3,425,774     $ 106,608     $ 78,545     $     $ 72,097     $ 1,624     $ 27,651     $ 38     $ 326,671     $ 507     $ 3,930,738     $ 108,777     $ 4,039,515  
Lease financing receivables
    4,187             234             386                                     4,807             4,807  
Other consumer
    50,616       26       1,341             2,225             111             61             54,354       26       54,380  
 
                                                                             
Total consumer
    3,480,577       106,634       80,120             74,708       1,624       27,762       38       326,732       507       3,989,899       108,803       4,098,702  
 
                                                                                                       
Commercial
                                                                                                       
Commercial real estate
    ,428,616       59,903       35,307             65,690             6,962             120,231             656,806       59,903       716,709  
Commercial and industrial
    29,653       597,056       3,901             607             360             2,118             36,639       597,056       633,695  
Construction and land
    200,943       107,225       2,281             8,136             395             138,144       1,610       349,899       108,835       458,734  
 
                                                                             
Total commercial
    659,212       764,184       41,489             74,433             7,717             260,493       1,610       1,043,344       765,794       1,809,138  
 
                                                                             
Total
  $ 4,139,789     $ 870,818     $ 121,609     $     $ 149,141     $ 1,624     $ 35,479     $ 38     $ 587,225     $ 2,117     $ 5,033,243     $ 874,597     $ 5,907,840  
 
                                                                             
Loan modifications and troubled debt restructurings
Doral has created a number of loan modification programs to help borrowers stay in their homes which also optimizes borrower performance and returns to Doral. In these cases, the restructure or loan modification fits the definition of TDR. The programs are designed to provide temporary relief and, if necessary, longer term financial relief to the consumer loan customer. Doral’s consumer loan loss mitigation program (including consumer loan products and residential mortgage loans), grants a concession for economic or legal reasons related to the borrowers’ financial difficulties that Doral would not otherwise consider. Doral’s loss mitigation programs can provide for one or a combination of the following: movement of unpaid principal and interest to the end of the loan, extension of the loan term for up to ten years, deferral of principal payments for a period of time, and reduction of interest rates either permanently (feature discontinued in 2010) or for a period of up to two years. No programs adopted by Doral provide for the forgiveness of contractually due principal or interest. Deferred principal and uncollected interest are added to the end of the loan term at the time of the restructuring and uncollected interest is not recognized as income until collected or when the loan is paid off. Doral wants to make these programs available only to those borrowers who have defaulted, or are likely to default, permanently on their loan and would lose their homes in foreclosure action absent some lender concession. However, Doral will move borrowers and properties to foreclosure if the Company is not reasonably assured that the borrower will be able to repay all contractual principal or interest (which is not forgiven in part or whole in any current program).

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Regarding the commercial loan loss mitigation programs, the Company adapted the loss mitigation program for residential mortgages discussed above for the small commercial real estate portfolio and used similar regulatory and accounting treatment for those loans. For the large commercial real estate, commercial and industrial and construction and land portfolios, the determination is made on a loan by loan basis at the time of restructuring as to whether a concession was made for economic or legal reasons related to the borrower’s financial difficulty that Doral would not otherwise consider. Concessions made for commercial loans could include reductions in interest rates below market rates, extensions of maturity beyond policy, waiving of borrower covenants, or other contract changes that would be considered a concession. Doral mitigates loan defaults for its commercial loan portfolios through its Collections function. The function’s objective is to minimize both early stage delinquencies and losses upon default of commercial assets. The group utilizes existing collections infrastructure of front-end dialers, doorknockers, work-out agents, and third-party consultants. In the case of residential construction projects and large commercial loans, the function utilizes third-party vendors to manage the residential construction projects in terms of construction, marketing and sales, and restructuring of large commercial loans.
Residential, other consumer or commercial loan modifications can result in returning a loan to accrual status when the criteria for returning a loan to performing status are met (please refer to Doral’s non-accrual policies previously described). Loan modifications also increase Doral’s interest income by returning a non-performing loan to performing status, and cash flows by providing for payments to be made by the borrower, and decreases foreclosure and real estate owned (“REO”) costs by decreasing the number of foreclosed properties. Doral continues to consider a modified loan as a non-performing asset for purposes of estimating its allowance for loan and lease losses until the borrower has made at least six consecutive contractual payments. At such time the loan will be treated as any other performing loan for purposes of estimating the allowance for loan and lease losses.
Loan modifications that are considered troubled debt restructurings completed during the quarters and six month periods ended June 30, 2011 and 2010 were as follows:
                                                 
    For the Quarters Ended June 30,  
    2011     2010  
            Pre-Modification     Post-Modification             Pre-Modification     Post-Modification  
            Outstanding Recorded     Outstanding Recorded             Outstanding Recorded     Outstanding Recorded  
(In thousands)   Number of Contracts     Investment     Investment     Number of Contracts     Investment     Investment  
Consumer:
                                               
Non FHA/VA Residential
    320     $ 37,000     $ 36,548       526     $ 64,062     $ 63,733  
Other Consumer
    8       46       46       23       143       130  
 
                                   
Total Consumer
    328       37,046       36,594       549       64,205       63,863  
 
                                               
Commercial:
                                               
Commercial Real Estate
    10     $ 3,309     $ 3,671       8     $ 1,690     $ 1,690  
Commercial and Industrial
    0                   2       5,226       5,226  
Construction and Land
    0                   4       14,018       14,010  
 
                                   
Total Commercial
    10       3,309       3,671       14       20,934       20,926  
 
                                               
Total Loan Modifications
    338     $ 40,355     $ 40,265       563     $ 85,139     $ 84,789  
 
                                   

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    Six Month Periods Ended June 30,  
    2011     2010  
            Pre-modification     Post-modification             Pre-modification     Post-modification  
    Number of     recorded     recorded     Number of     recorded     recorded  
(In thousands)   contracts     investment     investment     contracts     investment     investment  
Consumer modifications
                                               
Residential non FHA/VA
    1,130     $ 129,277     $ 127,318       712     $ 85,881     $ 85,643  
Other consumer
    18       109       109       36       297       269  
 
                                   
Total consumer
    1,148       129,386       127,427       748       86,178       85,912  
 
                                               
Commercial
                                               
Commercial real estate
    80     $ 18,937     $ 18,912       17     8,581     8,581  
Commercial and industrial
    0                   4     9,489     9,489  
Construction and land
    2       61       60       5       17,185       17,177  
 
                                   
Total commercial
    82       18,998       18,972       26       35,255       35,247  
 
                                               
Total loan modifications
    1,230     $ 148,384     $ 146,399       774     $ 121,433     $ 121,159  
 
                                   
Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-accrual loan. Recidivism occurs at a notably higher rate than do defaults on new origination loans, so modified loans present a higher risk of loss than do new origination loans.
Loan modifications considered troubled debt restructurings made during the twelve months previous to June 30, 2011, that defaulted during the six month period ending June 30, 2011 were as follows:
                 
    Six month period ended June 30, 2011  
(In thousands)   Number of contracts     Recorded investment  
Consumer
               
Residential mortgage — non FHA/VA
    681     $ 83,689  
Other consumer
    8       74  
 
           
Total consumer
    689       83,763  
 
               
Commercial
               
Commercial real estate
    105       23,800  
Construction and land
    5       6,824  
 
           
Total commercial
    110       30,624  
 
           
 
               
Total recidivism
    799     $ 114,387  
 
           
For the quarter and six month periods ended June 30, 2011, the Company would have recognized $2.5 million and $4.0 million, respectively, in additional interest income had all TDR loans been accounted for on an accrual basis.
As of June 30, 2011, construction TDRs include an outstanding principal balance of $77.5 million with commitments to disburse additional funds of $19.1 million.
10. Allowance for Loan and Lease Losses and Impaired Loans
Doral’s allowance for loan and lease losses (“ALLL”) is management’s estimate of credit losses inherent in the reported loan receivable balance as of the financial statement date. Management estimates the ALLL separately for each product category (non-FHA/VA residential mortgage loans, other consumer, commercial real estate, construction and land, and other commercial and industrial) and geography (Puerto Rico and U.S. mainland), and combines the amounts in reaching its estimate for the full portfolio.

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Management’s product category loss reserve estimate for performing loans considers: (i) the reserve is estimated based upon the probability of the performing loan defaulting at some future period, and (ii) Doral’s historical experience of charge-offs related to the outstanding principal balance.
For non-performing loans, the reserve is estimated either by (i) considering the loans’ current level of delinquency and the probability that the loan will be foreclosed upon from that delinquency stage, and the loss that will be realized assuming foreclosure (mortgage loans), or (ii) measuring impairment for individual loans considering the specific facts and circumstances of the borrower, guarantors, collateral, legal matters, market matters, and other circumstances that may affect the borrower’s ability to repay their loan, Doral’s ability to repossess and liquidate the collateral, and Doral’s ability to pursue and enforce any deficiency in payment received. The probability of a loan migrating to foreclosure whether a current loan or a past due loan, and the amount of loss given default, is based upon the Company’s own experience, with more recent experience judgmentally weighted more heavily in the calculated factors. With this practice management believes the factors used better represent existing economic conditions. In estimating the loss given default factor, management uses rates that are unique to ranges of loan-to-value ratios (calculated as current loan balance divided by the most recent appraisal value).
Loans determined to be TDRs are impaired and for purpose of estimating the ALLL must be individually evaluated for impairment. For residential mortgage loans determined to be TDRs, on a monthly basis, the Company pools TDRs with similar characteristics and performs an impairment analysis of discounted cash flows. If a pool yields a present value below the recorded investment in the pool of loans, an impairment is recognized by a charge to the provision for loan and lease losses and a credit to the ALLL. For loss mitigated loans without a concession in the interest rate, the Company performs an impairment analysis of discounted cash flows giving consideration of probability of default and loss given foreclosure on those estimated cash flows, and records an impairment by charging the provision for loan and lease losses with a corresponding credit to the ALLL.
The activity in Doral’s allowance for loan and lease losses account for the quarters and six month periods ending June 30, 2011 and 2010 were as follows:
                                                                 
    Quarter Ended June 30, 2011  
    Non-                             Construction     Commercial              
    FHA/VA     Other     Total     Commercial     and     and     Total        
(In thousands)   Residential     Consumer     Consumer     Real Estate     Land     Industrial     Commercial     Total  
Balance at beginning of period
  $ 54,016       5,565     $ 59,581     $ 23,956     $ 30,642     $ 6,025     $ 60,623     $ 120,204  
Provision for loan and lease losses
    5,410       854       6,264       4,372       2,278       409       7,059       13,323  
Losses charged to the allowance
    (4,271 )     (1,239 )     (5,510 )     (12,755 )     (21,769 )     (407 )     (34,931 )     (40,441 )
Recoveries
          367       367                   19       19       386  
 
                                               
Balance at end of period
  $ 55,155     $ 5,547     $ 60,702     $ 15,573     $ 11,151     $ 6,046     $ 32,770     $ 93,472  
 
                                               
Reported balance of loans (1)
  $ 3,537,904     $ 46,947     $ 3,584,851     $ 666,580     $ 389,920     $ 912,420     $ 1,968,920     $ 5,553,771  
 
                                               
ALLL for loans individually evaluated for impairment
  $ 26,963     $     $ 26,963     $ 9,071     $ 3,275     $ 342     $ 12,688     $ 39,651  
 
                                               
Reported balance of loans individually evaluated for impairment
  $ 792,005     $     $ 792,005     $ 252,166     $ 154,505     $ 11,708     $ 418,379     $ 1,210,384  
 
                                               
ALLL of loans collectively evaluated for impairment
  $ 28,192     $ 5,547     $ 33,739     $ 6,502     $ 7,876     $ 5,704     $ 20,082     $ 53,821  
 
                                               
Reported balance of loans collectively evaluated for impairment
  $ 2,745,899     $ 46,947     $ 2,792,846     $ 414,414     $ 235,415     $ 900,712     $ 1,550,541     $ 4,343,387  
 
                                               
 
(1)   Excludes reported balance of guaranteed loans and loans on savings deposits.

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    Quarter Ended June 30, 2010  
    Non-                             Construction     Commercial              
    FHA/VA     Other     Total     Commercial     and     and     Total        
(In thousands)   Residential     Consumer     Consumer     Real Estate     Land     Industrial     Commercial     Total  
Balance at beginning of period
  $ 53,708     $ 7,763     $ 61,471     $ 24,745     $ 57,233     $ 4,032     $ 86,010     $ 147,481  
Provision for loan and lease losses
    18,769       1,644       20,413       4,771       17,705       1,728       24,204       44,617  
Losses charged to the allowance
    (14,497 )     (2,106 )     (16,603 )     (430 )     (39,489 )     (978 )     (40,897 )     (57,500 )
Recoveries
          272       272                   43       43       315  
 
                                               
Balance at end of period
  $ 57,980     $ 7,573     $ 65,553     $ 29,086     $ 35,449     $ 4,825     $ 69,360     $ 134,913  
 
                                               
 
                                                               
Reported balance of loans (1)
  $ 3,674,920     $ 70,119     $ 3,745,039     $ 728,608     $ 382,572     $ 475,061     $ 1,586,241     $ 5,331,280  
 
                                               
 
                                                               
ALLL for loans individually evaluated for impairment
  $ 9,074     $     $ 9,074     $ 14,303     $ 29,256     $ 243     $ 43,802     $ 52,876  
 
                                               
 
                                                               
Reported balance of loans individually evaluated for impairment
  $ 250,028     $     $ 250,028     $ 146,469     $ 211,972     $ 244     $ 358,685     $ 608,713  
 
                                               
 
                                                               
ALLL of loans collectively evaluated for impairment
  $ 48,906     $ 7,573     $ 56,479     $ 14,783     $ 6,193     $ 4,582     $ 25,558     $ 82,037  
 
                                               
 
                                                               
Reported balance of loans collectively evaluated for impairment
  $ 3,424,892     $ 70,119     $ 3,495,011     $ 582,139     $ 170,600     $ 474,817     $ 1,227,556     $ 4,722,567  
 
                                               
 
                                                               
(1)     Excludes reported balance of guaranteed loans and loans on savings deposits.
 
                                                               
    Six Month Period Ended June 30, 2011  
    Non-                             Construction     Commercial              
    FHA/VA     Other     Total     Commercial     and     and     Total        
(In thousands)   Residential     Consumer     Consumer     Real Estate     Land     Industrial     Commercial     Total  
Balance at beginning of period
  $ 56,487     $ 6,274     $ 62,761     $ 29,712     $ 25,026     $ 6,153     $ 60,891     $ 123,652  
Provision for loan and lease losses
    6,165       1,349       7,514       (1,384 )     9,484       300       8,400       15,914  
Losses charged to the allowance
    (7,497 )     (2,837 )     (10,334 )     (12,755 )     (23,359 )     (426 )     (36,540 )     (46,874 )
Recoveries
          761       761                   19       19       780  
 
                                               
Balance at end of period
  $ 55,155     $ 5,547     $ 60,702     $ 15,573     $ 11,151     $ 6,046     $ 32,770     $ 93,472  
 
                                               
 
                                                               
Reported balance of loans (1)
  $ 3,537,904     $ 46,947     $ 3,584,851     $ 666,580     $ 389,920     $ 912,420     $ 1,968,920     $ 5,553,771  
 
                                               
 
                                                               
ALLL for loans individually evaluated for impairment
  $ 26,963     $     $ 26,963     $ 9,071     $ 3,275     $ 342     $ 12,688     $ 39,651  
 
                                               
 
                                                               
Reported balance of loans individually evaluated for impairment
  $ 792,005     $     $ 792,005     $ 252,166     $ 154,505     $ 11,708     $ 418,379     $ 1,210,384  
 
                                               
 
                                                               
ALLL of loans collectively evaluated for impairment
  $ 28,192     $ 5,547     $ 33,739     $ 6,502     $ 7,876     $ 5,704     $ 20,082     $ 53,821  
 
                                               
 
                                                               
Reported balance of loans collectively evaluated for impairment
  $ 2,745,899     $ 46,947     $ 2,792,846     $ 414,414     $ 235,415     $ 900,712     $ 1,550,541     $ 4,343,387  
 
                                               
 
(1)   Excludes reported balance of guaranteed loans and loans on savings deposits.

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    Six Month Period Ended June 30, 2010  
    Non-FHA/VA     Other     Total     Commercial     Construction     Commercial     Total        
(In thousands)   Residential     Consume     Consumer     Real Estate     Land     Industrial     Commercial     Total  
Balance at beginning of period
  $ 51,814     $ 8,338     $ 60,152     $ 21,883     $ 54,458     $ 4,281     $ 80,622     $ 140,774  
Provision for loan and lease losses
    25,378       3,277       28,655       7,839       20,390       1,654       29,883       58,538  
Losses charged to the allowance
    (19,212 )     (4,555 )     (23,767 )     (686 )     (39,521 )     (1,176 )     (41,383 )     (65,150 )
Recoveries
          513       513       50       122       66       238       751  
 
                                               
Balance at end of period
  $ 57,980     $ 7,573     $ 65,553     $ 29,086     $ 35,449     $ 4,825     $ 69,360     $ 134,913  
 
                                               
 
                                                               
Reported balance of loans (1)
  $ 3,674,920     $ 70,119     $ 3,745,039     $ 728,608     $ 382,572     $ 475,061     $ 1,586,241     $ 5,331,280  
 
                                               
 
                                                               
ALLL for loans individually evaluated for impairment
  $ 9,074     $     $ 9,074     $ 14,303     $ 29,256     $ 243     $ 43,802     $ 52,876  
 
                                               
 
                                                               
Reported balance of loans individually evaluated for impairment
  $ 250,028     $     $ 250,028     $ 146,469     $ 211,972     $ 244     $ 358,685     $ 608,713  
 
                                               
 
                                                               
ALLL of loans collectively evaluated for impairment
  $ 48,906     $ 7,573     $ 56,479     $ 14,783     $ 6,193     $ 4,582     $ 25,558     $ 82,037  
 
                                               
 
                                                               
Reported balance of loans collectively evaluated for impairment
  $ 3,424,892     $ 70,119     $ 3,495,011     $ 582,139     $ 170,600     $ 474,817     $ 1,227,556     $ 4,722,567  
 
                                               
 
(1)    Excludes reported balance of guaranteed loans and loans on savings deposits.

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The following table provides Doral’s recorded investment in impaired loans which reflects partial charge-offs and other amounts which reduce credit risk, the contractual unpaid principal balance (“UPB”), and the related allowance as of June 30, 2011 and December 31, 2010.
                                                                 
    As of June 30, 2011     December 31, 2010  
            Recorded     Related                     Recorded     Related        
(In thousands)   UPB     Investment     Allowance     Reserve %     UPB     Investment     Allowance     Reserve %(1)  
With no allowance recorded at the report date:
                                                               
Residential(2)
  $ 299,817     $ 277,954     $       %   $ 267,767     $ 264,785     $       %
 
                                               
Total consumer
    299,817       277,954             %     267,767       264,785             %
 
                                                               
Commercial real estate
    165,751       148,754             %     145,099       131,078             %
Commercial and industrial
    10,890       10,822             %     5,489       5,435             %
Construction and land
    107,945       107,535             %     96,357       85,252             %
 
                                               
Total commercial
    284,586       267,111             %     246,945       221,765             %
 
                                               
 
                                                               
With allowance recorded at the report date:
                                                               
Residential(2)
    529,184       514,051       26,963       5.25 %     537,698       533,223       27,347       5.13 %
 
                                               
Total consumer
    529,184       514,051       26,963       5.25 %     537,698       533,223       27,347       5.13 %
 
                                                               
Commercial real estate
    119,149       103,412       9,071       8.77 %     138,827       131,941       22,086       16.74 %
Commercial and industrial
    1,031       887       342       6.97 %     2,069       2,070       1,060       51.21 %
Construction and land
    47,085       46,970       3,275       38.56 %     118,966       105,872       18,200       17.19 %
 
                                               
Total commercial
    167,265       151,269       12,688       8.39 %     259,862       239,883       41,346       17.24 %
 
                                               
 
                                                               
Total
                                                               
Residential(2)
    829,001       792,005       26,963       3.40 %     805,465       798,008       27,347       3.43 %
 
                                               
Total consumer
    829,001       792,005       26,963       3.40 %     805,465       798,008       27,347       3.43 %
 
                                                               
Commercial real estate
    284,900       252,166       9,071       3.60 %     283,926       263,019       22,086       8.40 %
Commercial and industrial
    11,921       11,709       3,275       2.12 %     7,558       7,505       1,060       14.12 %
Construction and land
    155,030       154,505       342       2.92 %     215,323       191,124       18,200       9.52 %
 
                                               
Total commercial
    451,851       418,380       12,688       3.03 %     506,807       461,648       41,346       8.96 %
 
                                               
Total
  $ 1,280,852     $ 1,210,385     $ 39,651       3.28 %   $ 1,312,272     $ 1,259,656     $ 68,693       5.45 %
 
                                               
 
(1)   Gross reserve percent represents the amount of the allowance to the recorded investment.
 
(2)   As of December 31, 2010 includes UPB and recorded investment of $66.0 million and $65.7 million, respectively of TDRs not previously included as impaired loans.

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The second quarter ended June 30, 2011 included approximately $30.1 million of charge-offs as a result of adopting the practice of charging-off the portion of the difference between the loan balance before charge-off and the estimated fair value of the property collateralizing the loan prior to receipt of a third party appraisal due to the long delays to receive such appraisals in Doral’s Puerto Rico market. This new practice accelerated charge-offs into the 2011 second quarter, reduced the allowance for loan losses balance, and reduced the loan receivable balance.
The following table provides Doral’s average recorded investment in impaired loans and the related interest income recognized during the time within that period that the loans were impaired for the quarters and six month periods ended June 30, 2011 and 2010.
                                 
    Quarters Ended June 30,  
    2011     2010  
    Average             Average        
    Recorded     Interest Income     Recorded     Interest Income  
(In thousands)   Investment     Recognized     Investment     Recognized  
Consumer
                               
Non-FHA/VA residential
  $ 609,598     $ 6,015     $ 536,076     $ 6,878  
 
                       
Total consumer
    609,598       6,015       536,076       6,878  
 
                               
Commercial
                               
Commercial real estate
    241,285       1,241       156,604       647  
Commercial and industrial
    9,264       172       247       5  
Construction and land
    164,799       763       269,624       347  
 
                       
Total commercial
    415,348       2,176       426,475       999  
 
                       
 
                               
Total
  $ 1,024,946     $ 8,191     $ 962,551     $ 7,877  
 
                       
 
                               
    Six month period Ended June 30,  
    2011     2010  
    Average             Average        
    Recorded     Interest Income     Recorded     Interest Income  
(In thousands)   Investment     Recognized     Investment     Recognized  
Consumer
                               
Non-FHA/VA residential
  $ 626,380     $ 12,029     $ 485,222     $ 13,756  
 
                       
Total consumer
    626,380       12,029       485,222       13,756  
 
                               
Commercial
                               
Commercial real estate
    243,676       2,482       153,247       1,297  
Commercial and industrial
    9,606       344       250       10  
Construction and land
    172,351       1,526       270,389       693  
 
                       
Total commercial
    425,633       4,352       423,886       2,000  
 
                       
 
                               
Total
  $ 1,052,013     $ 16,381     $ 909,108     $ 15,756  
 
                       
For TDRs where impairment is measured based on the present value of expected future cash flows, the entire change in present value is recognized as a provision for loan and lease losses, therefore, interest income in the table above does not include any interest based on the change in present value attributable to the passage of time.

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11. Related Party Transactions
The following table summarizes certain information regarding Doral Financial’s loans outstanding to officers, directors and common stockholders controlling 5% or more for the periods indicated.
                 
(In thousands)   June 30, 2011     December 31, 2010  
Balance at beginning of period
  $ 1,300     $ 2,840  
Repayments
    (20 )     (96 )
Loans of former officers
    (29 )     (1,444 )
 
           
Balance at end of period(1)
  $ 1,251     $ 1,300  
 
           
 
(1)   At June 30, 2011 and December 31, 2010, none of the loans outstanding to officers, directors and 5% or more stockholders were delinquent.
At both June 30, 2011 and December 31, 2010, the amount of loans outstanding to officers, directors and 5% or more stockholders secured by mortgages on real estate totalled to $1.2 million.
Since 2000, Doral Financial has conducted business with an entity that provides property inspection services and is co-owned by the spouse of a former Executive Vice President of the Company (employed through the third quarter of 2010). The amount paid by the Company to this entity for the quarter and six month period ended June 30, 2010 totalled to $0.6 million and $1.2 million, respectively. No amounts were paid to this entity during 2011.
For both the quarter and six month periods ended June 30, 2010, the Company assumed approximately $0.5 million, of the professional services expense related to Doral Holdings. Doral Holdings was dissolved on December 15, 2010 and no fees have been paid during 2011.
12. Accounts Receivable and Other Assets
The Company reported accounts receivable of $41.6 million and $28.7 million as of June 30, 2011 and December 31, 2010, respectively. Total accounts receivable included $15.2 million and $12.5 million related to claims of loans foreclosed to FHA and VA as of June 30, 2011 and December 31, 2010, respectively.
13. Servicing Activities
The Company routinely originates, securitizes and sells mortgage loans into the secondary market. The Company generally retains the servicing rights and, in the past, also retained IOs. Mortgage Servicing Rights (“MSR”) represent the estimated present value of the normal servicing fees (net of related servicing costs) expected to be received on a loan being serviced over the expected term of the loan. MSRs entitle Doral Financial to a future stream of cash flows based on the outstanding principal balance of the loans serviced and the contractual servicing fee. The annual servicing fees generally range between 25 and 50 basis points, less, in certain cases, any corresponding guarantee fee. In addition, MSRs may entitle Doral Financial, depending on the contract language, to ancillary income including late charges, float income, and prepayment penalties net of the appropriate expenses incurred for performing the servicing functions. In certain instances, the Company also services loans with no contractual servicing fee. The servicing asset or liability associated with such loans is evaluated based on ancillary income, including float, late fees, prepayment penalties and costs.

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The changes in servicing assets measured using the fair value method for the quarters and six month periods ended June 30, 2011 and 2010 are shown below:
                                 
    Quarters Ended     Six Month Periods Ended  
    June 30,     June 30,  
(In thousands)   2011     2010     2011     2010  
Balance at beginning of period
  $ 116,299     $ 118,236     $ 114,342     $ 118,493  
Capitalization of servicing assets
    2,546       1,407       4,642       3,184  
Sales of servicing asset(1)
          (162 )           (192 )
Servicing release due to repurchase(2)
    (417 )     (1,029 )     (505 )     (1,165 )
Change in fair value
    (2,643 )     (5,447 )     (2,694 )     (7,315 )
 
                       
Balance at end of period(3)
  $ 115,785     $ 113,005     $ 115,785     $ 113,005  
 
                       
 
(1)   Amount represents MSRs sales related to $22.5 million and $24.0 million in principal balance of mortgage loans for the quarter and six month period ended 2010.
 
(2)   Amount represents the adjustment of MSR fair value related to the repurchase of $28.8 million and $74.5 million in principal balance of mortgage loans serviced for others for the quarters ended June 30, 2011 and 2010, and $35.1 million and $84.6 million for the six month periods ended June 30, 2011 and 2010, respectively.
 
(3)   Outstanding balance of loans serviced for third parties totalled to $8.0 billion and $8.3 billion as of June 30, 2011 and 2010, respectively, which includes $2.5 million and $2.8 million, respectively, of loans being serviced under sub-servicing arrangements.
The Company recognizes as assets the rights to service loans for others and records these assets at fair value. The fair value of the Company’s MSRs is determined based on a combination of market information on trading activity (servicing asset trades and broker valuations), benchmarking of servicing assets (valuation surveys) and cash flow modeling. The valuation of the Company’s servicing assets incorporates two sets of assumptions: (i) market derived assumptions for discount rates, servicing costs, escrow earnings rate, float earnings rate and cost of funds and (ii) market derived assumptions adjusted for the Company’s loan characteristics and portfolio behavior for escrow balances, delinquencies and foreclosures, late fees, prepayments and prepayment penalties. The constant prepayment rate (“CPR”) assumptions employed for the valuation of the Company’s servicing assets for the quarter ended June 30, 2011 was 7.3% compared to 9.3% for the corresponding 2010 period.
Discount rate assumptions for the Company’s servicing assets were stable for the quarters ended June 30, 2011 and 2010, which was 11.3% for both periods.
Based on recent prepayment experience, the expected weighted-average remaining life of the Company’s servicing assets at June 30, 2011 and 2010 was 7.3 years and 6.5 years, respectively. Any projection of the expected weighted-average remaining life of servicing assets is limited by conditions that existed at the time the calculations were performed.
At June 30, 2011 and December 31, 2010, fair values of the Company’s retained interest were based on internal models that incorporate market driven assumptions, such as discount rates, prepayment speeds and implied forward London Interbank Offered Rate (“LIBOR”) rates (in the case of variable IOs), adjusted by the particular characteristics of the Company’s servicing portfolio.
The weighted-averages of the key economic assumptions used by the Company in its internal models and the sensitivity of the current fair value of residual cash flows to immediate 10 percent and 20 percent adverse changes in those assumptions for mortgage loans at June 30, 2011, were as follows:
                 
            Interest-Only
(Dollars in thousands)   Servicing Assets   Strips
Carrying amount of retained interest
  $ 115,785     $ 43,750  
Weighted-average expected life (in years)
    7.3       5.8  
Constant prepayment rate (weighted-average annual rate)
    7.3 %     7.5 %
Decrease in fair value due to 10% adverse change
  $ (3,642 )   $ (1,013 )
Decrease in fair value due to 20% adverse change
  $ (7,115 )   $ (1,988 )
Residual cash flow discount rate (weighted-average annual rate)
    11.3 %     13.0 %
Decrease in fair value due to 10% adverse change
  $ (4,833 )   $ (1,496 )
Decrease in fair value due to 20% adverse change
  $ (9,301 )   $ (2,890 )

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These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or offset the sensitivities.
To determine the value of its portfolio of variable IOs, Doral Financial uses an internal valuation model that forecasts expected cash flows using forward LIBOR rates derived from the LIBOR/Swap yield curve at the date of the valuation. The characteristics of the variable IOs result in an increase in cash flows when LIBOR rates fall and a reduction in cash flows when LIBOR rates rise. This provides a mitigating effect on the impact of prepayment speeds on the cash flows, with prepayment expected to rise when long-term interest rates fall reducing the amount of expected cash flows and the opposite when long-term interest rates rise. Prepayment assumptions incorporated into the valuation model for variable and fixed IOs are based on publicly available, independently verifiable, prepayment assumptions for FNMA mortgage pools and statistically derived prepayment adjusters based on observed relationships between the Company’s and the FNMA’s U.S. mainland mortgage pool prepayment experiences.
This methodology resulted in a CPR of 7.5% and 11.1% for the quarters ended June 30, 2011 and 2010, respectively. The change in the CPR between 2011 and 2010 was due mostly to a generalized decrease in market interest rates.
The Company continued to benchmark its internal assumptions for setting its discount rate to a third party valuation provider. This methodology resulted in a discount rate of 13.0% for both quarters ended June 30, 2011 and 2010.
For IOs, Doral Financial recognizes as interest income (through the life of the IO) the excess of all estimated cash flows attributable to these interests over their recorded balance using the effective yield method. Doral Financial recognizes as interest income the excess of the cash collected from the borrowers over the yield payable to investors, less a servicing fee (“retained spread”), up to an amount equal to the yield on the IOs. Doral Financial accounts for any excess retained spread as amortization to the gross IO capitalized at inception. The Company updates its estimates of expected cash flows periodically and recognizes changes in calculated effective yield on a prospective basis.
The activity of interest-only strips is shown below:
                                 
    Quarters Ended     Six Month Periods Ended  
    June 30,     June 30,  
(In thousands)   2011     2010     2011     2010  
Balance at beginning of period
  $ 41,618     $ 43,584     $ 44,250     $ 45,723  
Amortization
    (1,947 )     (2,729 )     (4,128 )     (5,527 )
Gain on the IO value
    4,079       3,857       3,628       4,516  
 
                       
Balance at end of period
  $ 43,750     $ 44,712     $ 43,750     $ 44,712  
 
                       
The following table summarizes the estimated change in the fair value of the Company’s IOs, the constant prepayment rate and the weighted-average expected life under the Company’s valuation model, given several hypothetical (instantaneous and parallel) increases or decreases in interest rates. As of June 30, 2011, all of the mortgage loan sales contracts underlying the Company’s floating rate IOs were subject to interest rate caps.
(Dollars in thousands)
                                         
    Change in Interest Rates   Constant   Weighted-Average   Change in Fair   Percentage
    (Basis Points)   Prepayment Rate   Expected Life (Years)   Value of IOs   of Change
 
    200       5.3 %     6.8     $ (6,154 )     (14.1) %
 
    100       6.3 %     6.3       (3,445 )     (7.9) %
 
    50       6.8 %     6.1       (1,726 )     (3.9) %
 
  Base     7.5 %     5.8             %
 
    -50       8.2 %     5.6       1,695       3.9 %
 
    -100       8.9 %     5.4       2,676       6.1 %
 
    -200       10.2 %     5.0       4,177       9.5 %

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14. Sale and Securitization of Mortgage Loans
For the quarter and six month periods ended June 30, 2011, the unpaid principal balance of loan sales and securitizations totaled $132.5 million and $253.3 million, respectively, and $79.3 million and $167.2 million for the comparable 2010 periods while the principal balance of loans for which servicing was released or derecognized due to repurchases totalled $35.1 million and $84.6 million, for the six months ended June 30, 2011 and 2010, respectively.
Under most of the servicing agreements, the Company is required to advance funds to make scheduled payments to investors, if payments due have not been received from the mortgagors. At June 30, 2011 and December 31, 2010, mortgage servicing advances totalled $54.0 million and $51.5 million, respectively, net of a reserve of $8.8 million and $9.0 million, respectively.
In general, Doral Financial’s servicing agreements are terminable by the investors for cause. The Company’s servicing agreements with FNMA permit FNMA to terminate the Company’s servicing rights if FNMA determines that changes in the Company’s financial condition have materially adversely affected the Company’s ability to satisfactorily service the mortgage loans. Approximately 28% of Doral Financial’s mortgage loan servicing on behalf of third parties relates to mortgage servicing for FNMA. Termination of Doral Financial’s servicing rights with respect to FNMA or other parties for which it provides servicing could have a material adverse effect on the results of operations and financial condition of Doral Financial. As of June 30, 2011, no servicing agreements have been terminated.

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15. Servicing Related Matters
At June 30, 2011, escrow funds and custodial accounts included approximately $79.4 million deposited with Doral Bank PR. These funds are included within the cash and due from banks caption in the Company’s accompanying consolidated financial statements. Escrow funds and custodial accounts also included approximately $42.7 million deposited with other banks, which were excluded from the Company’s assets and liabilities. The Company had fidelity bond and errors and omissions coverage of $30.0 million and $17.0 million, respectively, as of June 30, 2011.
16. Other Real Estate Owned
The Company acquires real estate through foreclosure proceedings. Legal fees and other direct costs incurred in a foreclosure are expensed as incurred. Real estate held for sale totalled $101.5 million and $100.3 million as of June 30, 2011 and December 31, 2010, respectively.
The following table provides the balances of other real estate held for sale for the periods indicated:
                 
(In thousands)   June 30, 2011     December 31, 2010  
Residential
  $ 53,381     $ 63,794  
Commercial
    20,163       17,599  
Construction and land
    27,955       18,880  
 
           
Balance at end of period
  $ 101,499     $ 100,273  
 
           
The following table presents activity of OREO for the periods indicated:
                                 
    Quarters Ended     Six Month Periods Ended  
    June 30,     June 30,  
(In thousands)   2011     2010     2011     2010  
Balance at beginning of period
  $ 103,767     $ 100,345     $ 100,273     $ 94,219  
Additions
    22,331       37,368       51,703       56,090  
Sales
    (22,110 )     (10,324 )     (44,836 )     (16,617 )
Retirements
    (1,882 )     (1,735 )     (4,266 )     (4,124 )
Provision for OREO losses
    (607 )     (22,477 )     (1,375 )     (26,391 )
 
                       
Balance at end of period
  $ 101,499     $ 103,177     $ 101,499     $ 103,177  
 
                       
17. Deposits
The following table summarizes deposit balances:
                 
(In thousands)   June 30, 2011     December 31, 2010  
Brokered certificates of deposit
  $ 2,031,108     $ 2,359,254  
Certificates of deposit
    607,701       703,473  
Money markets accounts
    554,528       475,467  
NOW accounts and other transactions accounts
    414,061       411,633  
Regular savings
    409,812       410,418  
 
           
Total interest-bearing
    4,017,210       4,360,245  
Non-interest-bearing deposits
    285,582       258,230  
 
           
Total deposits
  $ 4,302,792     $ 4,618,475  
 
           
At June 30, 2011 and December 31, 2010, the Company reclassified from deposit accounts to loan balances $0.5 million and $0.6 million, respectively, of overdrafts.

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18. Securities Sold Under Agreements to Repurchase
As part of its financing activities the Company enters into sales of securities under agreements to repurchase the same or substantially similar securities. The Company retains control over such securities. Accordingly, the amounts received under these agreements represent borrowings, and the securities underlying the agreements remain in the Company’s asset accounts. These transactions are carried at the amounts at which transactions will be settled. The counterparties to the contracts generally have the right to repledge the securities received as collateral. Those securities are presented in the Consolidated Statements of Financial Condition as part of pledged investment securities. Securities sold under agreements to repurchase consisted of the following:
                 
(Dollars in thousands)   June 30, 2011     December 31, 2010  
Repurchase agreements with maturities ranging from November 2012 to June 2015 (2010- March 2012 to June 2015), at various fixed rates averaging 2.42% and 3.15%, at June 30, 2011 and December 31, 2010, respectively.
    342,300       1,026,800  
 
               
Callable repurchase agreements with maturity date from August 2014 to January 2015, at various fixed rates averaging 2.33% at December 31, 2010 with callable dates between July and August 2012.
          50,000  
 
               
Putable repurchase agreement with a maturity of February 17, 2014 at a rate of 2.98% at June 30, 2011 and December 31, 2010, with a callable date of August 2011 (2010 - February 2011).
    100,000       100,000  
 
           
 
  $ 442,300     $ 1,176,800  
 
           
Maximum repurchase agreements outstanding at any month end during the six month period ended June 30, 2011 were $1.2 billion. The approximate average daily outstanding balance of securities sold under repurchase agreements for the six month period ended June 30, 2011 was $1.0 billion. The weighted-average interest of such agreements, computed on a daily basis was 3.01% for the six month period ended June 30, 2011.
During the second quarter of 2011 the Company substituted $515.0 million of securities sold under agreements to repurchase with advances from FHLB and retired $219.5 million of securities sold under agreements to repurchase upon the sale of investment securities pledged as collateral incurring prepayment charges of $3.1 million.

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19. Advances from FHLB
Advances from FHLB consisted of the following:
                 
(Dollars in thousands)   June 30, 2011     December 31, 2010  
Non-callable advances with maturities ranging from October 2011 to February 2016 (2010- January 2011 to May 2013) at various fixed rates averaging 3.09% and 3.64%, at June 30, 2011 and December 31, 2010, respectively.
  $ 1,188,849     $ 747,420  
 
               
Non-callable advances with maturities ranging from September 2011 to November 2012, tied to 1-month LIBOR adjustable monthly, at a variable rate of 0.21% and 0.28% at June 30, 2011 and December 31, 2010, respectively.
    74,000       74,000  
 
               
Putable structured advances due on March 2012 at a fixed rate of 5.04% at June 30, 2011 and December 31, 2010, respectively, putable at September 2011 (2010- March 2011).
    80,000       80,000  
 
           
 
  $ 1,342,849     $ 901,420  
 
           
Maximum advances outstanding at any month end during the six month period ended June 30, 2011 were $1.3 billion. The approximate average daily outstanding balance of advances from FHLB for the six month period ended June 30, 2011 was $1.0 billion. The weighted-average interest of such advances, computed on a daily basis was 3.14% for the six month period ended June 30, 2011.
At June 30, 2011, the Company had pledged qualified collateral in the form of residential mortgage loans with an estimated market value of $1.4 billion to secure the above advances from FHLB, which generally the counterparty is not permitted to sell or repledge.
In January 2011, the Company entered into an agreement with the FHLB to exchange $555.4 million of its non-callable term advances, reducing the average contractual interest rate on those advances to 1.7% from 4.1%, and the average effective interest rate from 4.1% to 2.7%, and extending the average maturities to 39 months from 14 months. This transaction resulted in a $22.0 million fee paid to FHLB, which is capitalized and amortized as yield adjustment over the term of the borrowing.
During the second quarter of 2011 the Company increased its FHLB advances, using the proceeds to repay securities sold under agreements to repurchase from the FHLB, reducing contractual interest rates from 4.2% to 1.9%, and the average effective interest rate from 4.1% to 3.7%, and extending average maturity from 2.3 years to 4.0 years. The transaction resulted in a $40.2 million fee which is capitalized and amortized as a yield adjustment. The proceeds from the increase in FHLB advances were used to repay other repurchase agreements, fund new loans, or were retained in cash.
The FHLB advances are subject to early termination fees.

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20. Loans Payable
At June 30, 2011 and December 31, 2010, loans payable consisted of financing agreements with local financial institutions secured by mortgage loans.
Outstanding loans payable consisted of the following:
                 
(In thousands)   June 30, 2011     December 31, 2010  
Secured borrowings with local financial institutions, at variable interest rates tied to 3-month LIBOR averaging 1.76% and 1.74% at June 30, 2011 and December 31, 2010, respectively, collateralized by residential mortgage loans.
  $ 279,724     $ 287,511  
 
               
Secured borrowings with local financial institutions, at fixed interest rates averaging 7.39% and 7.40% at June 30, 2011 and December 31, 2010, respectively, collateralized by residential mortgage loans.
    14,899       16,524  
 
           
 
  $ 294,623     $ 304,035  
 
           
The expected maturity date of secured borrowings based on collateral is from present to December 2025. Maximum loans payable outstanding at any month end during the six month period ended June 30, 2011 were $301.6 million. The approximate average daily outstanding balance of loans payable for the six month period ended June 30, 2011 was $300.1 million. The weighted-average interest of such borrowings, computed on a daily basis was 2.04% for the six month period ended June 30, 2011.
At June 30, 2011 and December 31, 2010, the Company had $119.7 million and $122.0 million, respectively, of loans held for sale and $174.3 million and $180.4 million, respectively, of loans receivable that were pledged to secure financing agreements with local financial institutions. Such loans can be repledged by the counterparty.

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21. Notes Payable
Notes payable consisted of the following:
                 
(In thousands)   June 30, 2011     December 31, 2010  
$30.0 million notes, net of discount, bearing interest at 7.00%, due on April 26, 2012, paying interest monthly.
  $ 29,921     $ 29,875  
 
               
$100.0 million notes, net of discount, bearing interest at 7.65%, due on March 26, 2016, paying interest monthly.
  98,896     98,801  
 
               
$40.0 million notes, net of discount, bearing interest at 7.10%, due on April 26, 2017, paying interest monthly.
    39,524       39,492  
 
               
$30.0 million notes, net of discount, bearing interest at 7.15%, due on April 26, 2022, paying interest monthly.
    29,513       29,499  
 
               
Bonds payable secured by mortgage on building at fixed rates ranging from 6.75% to 6.90%, with maturities ranging from December 2011 to December 2029, paying interest monthly.
    37,935       38,445  
 
               
Bonds payable at a fixed rate of 6.25%, with maturities ranging from December 2011 to December 2029, paying interest monthly.
    7,300       7,400  
 
               
Note payable with a local financial institution, collateralized by IOs, at a fixed rate of 7.75%, paying principal and interest monthly, last payment due on December 2013.
    17,510       20,624  
 
               
$250.0 million notes, net of discount, bearing interest at a variable interest rate (3-month LIBOR plus 1.85%), due on July 21, 2020, paying interest quarterly comencing on January 2011.
    249,831       249,822  
 
           
 
  $ 510,430     $ 513,958  
 
           
Doral Financial is the guarantor of various unregistered serial and term bonds issued by Doral Properties, a wholly-owned subsidiary, through the Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority (“AFICA”). The bonds were issued to finance the construction and development of the Doral Financial Plaza building, the headquarters facility of Doral Financial. As of June 30, 2011, the outstanding principal balance of the bonds was $45.2 million with fixed interest rates, ranging from 6.25% to 6.90%, and maturities ranging from December 2011 to December 2029. Certain series of the bonds are secured by a mortgage on the building and underlying real property.
On July 8, 2010, the Company, through its subsidiary, Doral Money, entered into a collateralized loan obligation (“CLO”) arrangement with a third party in which up to $450.0 million of largely U.S. mainland based commercial loans are pledged to collateralize AAA rated debt of $250.0 million paying three month LIBOR plus 1.85 percent issued by Doral CLO I, Ltd. Doral CLO I, Ltd. is a variable interest entity created to hold commercial loans and issue the previously noted debt and $200.0 million of subordinated notes to the Company whereby the Company receives any excess proceeds after payment of the senior debt interest and other fees and charges specified in the indenture agreement. The Company also serves as collateral manager of the assets of Doral CLO I, Ltd. Doral CLO I, Ltd. is consolidated with the Company in these financial statements.
DLAM, LLC is a subsidiary of Doral Money and holds the $200.0 million of subordinated notes issued by Doral CLO I, Ltd. DLAM, LLC is consolidated with the Company in these financial statements.
22. Income Taxes
Background
Income taxes include Puerto Rico income taxes as well as applicable U.S. federal and state taxes. As Puerto Rico corporations, Doral Financial and all of its Puerto Rico subsidiaries are generally required to pay U.S. income taxes only with respect to their income derived from the active conduct of a trade or business in the United States (excluding Puerto Rico) and certain investment income derived from U.S. assets. Any such tax is creditable, with certain limitations, against Puerto Rico income taxes. Except for the operations of Doral Bank US and Doral Money, substantially all of the Company’s operations are conducted through subsidiaries in Puerto Rico. Doral Bank US and Doral Money are U.S. corporations and are subject to U.S. income-tax on their income derived from all sources.

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Until December 31, 2010, the maximum statutory corporate income tax rate in Puerto Rico was 39.00%. Under the 1994 Puerto Rico Internal Revenue Code, as amended (“1994 Code”), Corporations are not permitted to file consolidated returns with their subsidiaries and affiliates. Doral Financial is entitled to a 100% dividend received deduction on dividends received from Doral Bank PR or any other Puerto Rico subsidiary subject to tax under the Puerto Rico tax code.
On March 9, 2009, the Governor of Puerto Rico signed into law the Special Act Declaring a State of Fiscal Emergency and Establishing an Integral Plan of Fiscal Stabilization to Save Puerto Rico’s Credit, Act No. 7 (the “Act”). Pursuant to the Act, Section 1020A was introduced to the Code to impose a 5.00% surtax over the total tax determined for corporations, partnerships, trusts, estates, as well as individuals whose combined gross income exceeds $100,000 or married individuals filing jointly whose gross income exceeds $150,000. This surtax is effective for tax years commenced after December 31, 2008 and before January 1, 2012. This increased the Company’s income tax rate from 39.00% to 40.95% for tax years from 2009 through 2011.
On November 15, 2010, Act 171 was enacted into law (“Act 171”) generally providing, among other things: (1) an income tax credit equal to 7.00% of the “tax liability due” to corporations that paid the Christmas bonus required by local labor laws, and (2) extending to 10 years the carry forward term of net operating losses incurred for years commenced after December 31, 2004 and before December 31, 2012.
On January 31, 2011, the Governor signed into law the Internal Revenue Code of 2011 (“2011 Code”) making the 1994 Code largely ineffective, for years commenced after December 31, 2010. Under the provisions of the 2011 Code, the maximum statutory corporate income tax rate in 30.00% for years starting after December 31, 2010 and ending before January 1, 2014; if the government meets its income generation and expense control goals, for years started after December 31, 2013, the maximum corporate tax rate will be 25.00%. The 2011 Code eliminated the special 5.00% surtax on corporations for tax year 2011. In general, the 2011 Code maintains the extension in the carry forward periods for net operating losses from 7 to 10 years as provided for in Act 171; maintains the concept of the alternative minimum tax although it changed the way it is computed; allows limited liability companies to have flow-through treatment under certain circumstances; imposes additional restriction on the use of net operating loss carry forwards after certain types of reorganizations and/or changes in control; and specifies what types of auditors’ report will be acceptable when audited financial statements are required to be filed with the income tax return. Additionally, the 2011 Code provides for changes in the implications of being in a controlled group of corporations and/or a group of related corporations. Notwithstanding the 2011 Code, a corporation may be subject to the provisions of the 1994 Code if it so elects by the time it files its income tax return for the first year commenced after December 31, 2010 and ending before January 1, 2012. If the election is made to remain subject to the provisions of the 1994 Code, such election will be effective that year and the next four succeeding years.
The Company is evaluating the impact of the tax reform on its results of operations including the election to be taxed under the 1994 Code. Nevertheless, the Company recorded its deferred tax assets estimated to reverse after 2015 at the 30.00% tax rate required for all taxable earnings beginning in 2016, which is the latest taxable year that it would be permitted to elect taxation under the 1994 Code. Puerto Rico deferred tax assets subject to the maximum statutory tax rate and estimated to reverse prior to 2016, together with any related valuation allowance, are recorded at the 39.00% tax rate pursuant to the 1994 Code. Upon determination of which alternative treatment will be followed, the Company will adjust its deferred tax assets for any required tax rate change, if applicable. Adoption of the 2011 Code as of June 30, 2011 would represent an additional deferred tax expense of $8.4 million.
Income Tax Expense
The components of income tax expense are summarized below.
                                 
    Quarters Ended     Six month periods ended  
    June 30,     June 30,  
(In thousands)   2011     2010     2011     2010  
Current income tax expense — United States
  $ 3,101     $ 3,615     $ 5,475     $ 3,890  
Deferred income tax expense (benefit):
                               
Puerto Rico
    450       1,008       3,120       2,795  
United States
    (680 )     (136 )     (627 )     331  
 
                       
Total deferred income tax (benefit) expense
    (230 )     872       2,493       3,126  
 
                       
Total income tax expense (benefit)
  $ 2,871     $ 4,487     $ 7,968     $ 7,016  
 
                       
The current income tax expense of $3.1 million and $5.5 million for the quarter and six month periods ended June 30, 2011, respectively, was related to taxes on U.S. source income. The deferred tax benefit of $0.2 million and deferred tax expense of $2.5 million for the quarter and six month periods ended June 30, 2011 reflected reductions over the comparable periods in 2010 due to higher taxes recognized in 2010 related to U.S. source income, as well as the impact of tax rate change on the current period valuation allowance, partially offset by realization of operational deferred tax assets. The Puerto Rico deferred income tax expense of $3.1

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million for the six months ended June 30, 2011 was related to the net effect on the Company’s deferred tax assets of (i) Puerto Rico tax legislation approved in January 2011 lowering the effective tax rate, resulting in a deferred tax expense of $18.8 million, (ii) the increased earnings expectation for profitable Puerto Rico entities which resulted in a deferred tax benefit of $17.4 million, and (iii) net amortization of deferred taxes of $1.7 million.
Deferred Tax Components
The Company’s DTA consists primarily of the differential in the tax basis of IOs sold, net operating loss carry-forwards and other temporary differences arising from the daily operations of the Company.
The Company has entered into several agreements with the Puerto Rico Treasury Department related to the intercompany transfers of IOs (The “IO Tax Asset” or “IO”) and its tax treatment thereon. Under the agreements, the Company established the tax basis of all the IO transfers, clarified that for Puerto Rico income tax purpose, the IO Tax Asset is a stand-alone intangible asset subject to straight-line amortization based on a useful life of 15 years, and established that the IO Tax Asset could be transferred to any entity within the Doral Financial corporate group, including the Puerto Rico banking subsidiary. During the third quarter of 2009, the Company entered into an agreement with the Puerto Rico Treasury Department that granted the Company a two year moratorium of the amortization of the IO Tax Asset. This agreement resulted in a benefit of $11.2 million for the third quarter of 2009 and was effective for the taxable year beginning January 1, 2009. The realization of the deferred tax asset related to the differential in the tax basis of IOs sold is dependent upon the existence of, or generation of, taxable income during the remaining 12 year period (15 year original amortization period, 17 year original amortization period including the two year moratorium) in which the amortization of the IO Tax Asset is available. The IOs expire in 2022. Any IO amortization in excess of all legal entities’ taxable income would become a NOL subject to the 7 or 10 year carry-over period. Upon a business combination, which is not structured as a purchase of assets, the IOs should survive and be available to be used by the group’s legal entities.
NOLs generated between 2005 and 2011 can be carried forward for a period of 10 years (there is no carry-back allowed in Puerto Rico). The NOLs creating deferred tax assets as of June 30, 2011, expire beginning in 2016 until 2021 for Puerto Rico entities and 2025 through 2029 for United States entities filing in New York. Since each legal entity files a separate income tax return, the NOLs can only be used to offset future taxable income of the entity that incurred it.
The Company evaluates its deferred tax asset for realizability, and the deferred tax asset is reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or all of the deferred tax asset will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized.
In assessing the realization of deferred tax assets, the Company considers the expected reversal of its deferred tax assets and liabilities, projected future taxable income, cumulative losses in recent years, and tax planning strategies. The determination of a valuation allowance on deferred tax assets requires judgment based on the weight of all available evidence and considering the relative impact of negative and positive evidence.
As of June 30, 2011, the Company had two Puerto Rico entities which had incurred several consecutive years of losses. For purposes of assessing the realization of the DTAs, the loss position for these two entities is considered significant negative evidence that has caused management to conclude that the Company will not be able to fully realize the deferred tax assets related to these two entities in the future. Accordingly, as of June 30, 2011 and December 31, 2010, the Company determined that it was more likely than not that $441.2 million and $462.7 million, respectively, of its gross deferred tax asset would not be realized and maintained a valuation allowance for that amount.

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As of June 30, 2011 and December 31, 2010, the Company’s deferred tax assets were as follows:
                 
(In thousands)   June 30, 2011     December 31, 2010  
Deferred income tax asset resulting from:
               
Differential in tax basis of IOs sold
  $ 207,797     $ 237,912  
Net operating loss carry-forwards
    226,509       193,322  
Allowance for loan and lease losses
    36,868       48,635  
Capital loss carry-forward
    18,227       26,783  
Reserve for losses on OREO
    13,367       17,340  
Other
    42,378       44,445  
 
           
Gross deferred tax asset
    545,146       568,437  
Valuation allowance
    (441,188 )     (462,725 )
 
           
Net deferred tax asset
  $ 103,958     $ 105,712  
 
           
As of June 30, 2011 and December 31, 2010, the deferred tax asset valuation allowance off-set the following deferred tax assets:
                 
(In thousands)   June 30, 2011     December 31, 2010  
Differential in tax basis of IOs sold
  $ 115,494     $ 143,550  
Net operating loss carry-forwards
    220,376       186,447  
Allowance for loan and lease losses
    34,161       45,950  
Capital loss carry-forward
    18,224       26,779  
Reserve for losses on OREO
    13,321       17,294  
Other
    39,612       42,705  
 
           
Total valuation allowance
  $ 441,188     $ 462,725  
 
           
The valuation allowance also includes $0.8 million and $1.3 million related to deferred taxes on unrealized losses on cash flow hedges as of June 30, 2011 and December 31, 2010, respectively.
Management did not establish a valuation allowance on the deferred tax assets generated on the unrealized gains and losses of its securities available for sale as of June 30, 2011 and December 31, 2010 because the Company had the positive intent and the ability to hold the securities until maturity or recovery of value.

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As of June 30, 2011 and December 31, 2010, the deferred tax asset by legal entity was as follows:
                                                         
    As of June 30, 2011  
    Doral             Doral     Doral                    
    Financial     Doral     Mortgage     Insurance     Doral     Doral        
(In thousands)   Corporation     Bank PR     LLC     Agency     Money     Bank FSB     Total  
Differential in tax basis of IOs sold
  $ 207,797     $     $     $     $     $     $ 207,797  
Net operating loss carry-forwards
    48,544       171,832       5,030                   1,103       226,509  
Allowance for loan and lease losses
    4,178       29,983                   2,194       513       36,868  
Capital loss carry-forward
    849       17,375                         3       18,227  
Reserve for losses on OREO
    3,278       10,043                         46       13,367  
Unrealized gains on investment securities available for sale
    474                                     474  
Other
    15,109       25,352       172       2,905       221       278       44,037  
     
Deferred tax assets
    280,229       254,585       5,202       2,905       2,415       1,943       547,279  
Unrealized gains on investment securities available for sale
          (1,095 )                             (1,095 )
Other
    (549 )     (324 )     (120 )           (45 )           (1,038 )
     
Deferred tax liabilities
    (549 )     (1,419 )     (120 )           (45 )           (2,133 )
Valuation allowance
    (186,927 )     (254,261 )                             (441,188 )
 
                                         
Net deferred tax asset (liability)
  $ 92,753     $ (1,095 )   $ 5,082     $ 2,905     $ 2,370     $ 1,943     $ 103,958  
 
                                         
                                                         
    As of December 31, 2010  
    Doral             Doral     Doral                    
    Financial     Doral     Mortgage     Insurance     Doral     Doral        
(In thousands)   Corporation     Bank PR     LLC     Agency     Money     Bank FSB     Total  
Differential in tax basis of IOs sold
  $ 237,912     $     $     $     $     $     $ 237,912  
Net operating loss carry-forwards
    46,634       139,813       5,963       83             829       193,322  
Allowance for loan and lease losses
    3,554       42,396                   2,098       587       48,635  
Capital loss carry-forward
    6,776       20,003                         4       26,783  
Reserve for losses on OREO
    4,903       12,391                         46       17,340  
Other
    14,887       29,403       178       2,935       14       100       47,517  
 
                                         
Deferred tax assets
    314,666       244,006       6,141       3,018       2,112       1,566       571,509  
Unrealized gains on investment securities available for sale
          (1,889 )                             (1,889 )
Other
    (700 )     (299 )     (135 )           (49 )           (1,183 )
 
                                         
Deferred tax liabilities
    (700 )     (2,188 )     (135 )           (49 )           (3,072 )
Valuation allowance
    (219,017 )     (243,708 )                             (462,725 )
 
                                         
Net deferred tax asset (liability)
  $ 94,949     $ (1,890 )   $ 6,006     $ 3,018     $ 2,063     $ 1,566     $ 105,712  
 
                                         
Puerto Rico deferred tax assets subject to the maximum statutory tax rate and estimated to reverse prior to 2016, together with any related valuation allowance, are recorded at the tax rate in effect under the 1994 Code, 39.00% or 40.95% as applicable. As of June 30, 2011, DTAs totalling $457.7 million were at the higher rates with a valuation allowance of $422.3 million. DTAs of $62.4 million were at the 30.00% tax rate while DTAs of $25.1 million with a valuation allowance of $18.9 million, were at other tax rates (and would not be impacted by the change in the tax code). If the Company elects to adopt the 2011 Code, DTAs would be $439.4 million with a valuation allowance of $343.7 million for a net DTA of $95.7 million.
For Puerto Rico taxable entities with positive core earnings, a valuation allowance on deferred tax assets has not been recorded since they are expected to continue to be profitable. At June 30, 2011, the net deferred tax asset associated with these two companies was $8.0 million, compared to $9.0 million at December 31, 2010. In addition, approximately, $92.3 million of the IO tax asset maintained at the holding company would be realized through these entities. In management’s opinion, for these companies, the positive evidence of profitable core earnings outweighs any negative evidence.

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Failure to achieve sufficient projected taxable income in the entities and deferred tax assets where a valuation allowance has not been established, might affect the ultimate realization of the net deferred tax assets.
Management assesses the realization of its deferred tax assets at each reporting period. To the extent that earnings improve and the deferred tax assets become realizable, the Company may be able to reduce the valuation allowance through earnings.
Accounting for Uncertainty in Income Taxes
As of June 30, 2011, the Company did not have unrecognized tax benefits and had accrued interest of $0.8 million on previously unrecognized tax benefits. The Company classifies all interest related to tax uncertainties as income tax expense.
The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the expiration of statutes of limitation, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity, and the addition or elimination of uncertain tax positions. During the third quarter of 2010, the Company settled its uncertain tax positions. As of June 30, 2011, the following years remain subject to examination: U.S. Federal jurisdictions — 2004 through 2008 and Puerto Rico — 2005 through 2008.
During the six months ended June 30, 2011, the Company did not identify any additional uncertain tax position.
23. Guarantees
In the ordinary course of the business, Doral Financial makes certain representations and warranties to purchasers and insurers of mortgage loans at the time of the loan sales to third parties regarding the characteristics of the loans sold, and in certain circumstances, such as in the event of early or first payment default. To the extent the loans do not meet specified characteristics, if there is a breach of contract of a representation or warranty or if there is an early payment default, Doral Financial may be required to repurchase the mortgage loan and bear any subsequent loss related to the loan. For the six month period ended June 30, 2011, repurchases totalled $4.2 million, compared to $50,000 for the corresponding 2010 period. These repurchases were at fair value and no significant losses were incurred.
In the past, in relation to its asset securitizations and loan sale activities, the Company sold pools of delinquent FHA, VA and conventional mortgage loans on a servicing retained basis. Following these transactions, the loans are not reflected on Doral Financial’s Consolidated Statement of Financial Condition. Under these arrangements, as part of its servicing responsibilities, Doral Financial is required to advance the scheduled payments of principal, interest and taxes whether or not collected from the underlying borrower. While Doral Financial expects to recover a significant portion of the amounts advanced through foreclosure or, in the case of FHA and VA loans, under the applicable FHA and VA insurance and guarantee programs, the amounts advanced tend to be greater than normal arrangements because of the delinquent status of the loans. As of June 30, 2011 and December 31, 2010, the outstanding principal balance of such delinquent loans was $125.1 million and $139.6 million, respectively.
In addition, Doral Financial’s loan sale activities in the past included certain mortgage loan sale and securitization transactions subject to recourse arrangements that require Doral Financial to repurchase or substitute the loan if the loans are 90 — 120 days or more past due or otherwise in default. The Company is also required to pay interest on delinquent loans in the form of servicing advances. Under certain of these arrangements, the recourse obligation is terminated upon compliance with certain conditions, which generally involve: (i) the lapse of time (normally from four to seven years), (ii) the lapse of time combined with certain other conditions such as the unpaid principal balance of the mortgage loans falling below a specific percentage (normally less than 80%) of the appraised value of the underlying property, or (iii) the amount of loans repurchased pursuant to recourse provisions reaching a specific percentage of the original principal amount of loans sold (generally from 10% to 15%). As of June

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30, 2011 and December 31, 2010, the Company’s records reflected that the outstanding principal balance of loans sold subject to full or partial recourse was $0.7 billion and $0.8 billion, respectively. As of such dates, the Company’s records also reflected that the maximum contractual exposure to Doral Financial if it were required to repurchase all loans subject to recourse was $0.7 billion. Doral Financial’s contingent obligation with respect to its recourse provision is not reflected on the Company’s Consolidated Financial Statements, except for a liability of estimated losses from such recourse agreements, which is included as part of “Accrued expenses and other liabilities”. The Company discontinued the practice of selling loans with recourse obligations in 2005. Doral Financial’s current strategy is to sell loans on a non-recourse basis, except recourse for certain early payment defaults and industry standard representations and warranties. For the quarter and six month period ended June 30, 2011, the Company repurchased at fair value $1.4 million and $5.8 million, respectively, pursuant to recourse provisions, compared to $6.7 million and $14.0 million, respectively, for the corresponding periods of 2010.
Doral Financial’s reserve for its exposure to recourse amounted to $10.1 million and $10.3 million as of June 30, 2011 and December 31, 2010, respectively and the reserve for other credit-enhanced transactions explained above amounted to $8.8 million and $9.0 million as of June 30, 2011 and December 31, 2010, respectively.
The following table shows the changes in the Company’s liability of estimated losses from recourse agreements, included in the Statement of Financial Condition, for each of the periods shown:
                 
    Quarter Ended     Six Month Period Ended  
(In thousands)   June 30, 2011     June 30, 2011  
Balance at beginning of period
  $ 9,877     $ 10,264  
Net charge-offs / termination
    (100 )     (728 )
Provision for recourse liability
    352       593  
 
           
Balance at end of period
  $ 10,129     $ 10,129  
 
           
24. Financial Instruments with Off-Balance Sheet Risk
The following tables summarize Doral Financial’s commitments to extend credit, commercial and performance standby letters of credit and commitments to sell loans.
                 
(In thousands)   June 30, 2011     December 31, 2010  
Commitments to extend credit
  $ 146,982     $ 139,791  
Commitments to sell loans
    98,123       64,751  
Commercial and Performance standby letter of credit
    2,664       25  
 
           
Total
  $ 247,769     $ 204,567  
 
           
The Company enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments may include commitments to extend credit and sell loans. The contractual amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
Commitments to extend credit are agreements to lend to a customer as long as the conditions established in the contract are met. Commitments generally have fixed expiration dates or other termination clauses. Generally, the Company does not enter into interest rate lock agreements with borrowers.
The Company purchases mortgage loans and simultaneously enters into a sale and securitization agreement with the same counterparty, essentially a forward contract that meets the definition of a derivative during the period between trade and settlement date.
A letter of credit is an arrangement that represents an obligation on the part of the Company to a designated third party, contingent upon the failure of the Company’s customer to perform under the terms of the underlying contract with a third party. The amount of the letter of credit represents the maximum amount of credit risk in the event of non-performance by these customers. Under the terms of a letter of credit, an obligation arises only when the underlying event fails to occur as intended, and the obligation is generally up to a stipulated amount and with specified terms and conditions. Letters of credit are used by the customer as a credit enhancement and typically expire without having been drawn upon.

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The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty.
25. Commitments and Contingencies
Total minimum rental and operating commitments for leases in effect at June 30, 2011, were as follow:
         
(In thousands)        
2012
  $ 6,225  
2013
    6,191  
2014
    5,408  
2015
    5,183  
2016
    5,049  
2017 and thereafter
    22,860  
 
     
 
  $ 50,916  
 
     
Rent expense for the quarter and six month period ended June 30, 2011 totalled approximately $2.2 million and $4.3 million, respectively, compared to $1.7 million and $3.4 million, respectively for the corresponding 2010 periods.
Doral Financial and its subsidiaries are defendants in various lawsuits or arbitration proceedings arising in the ordinary course of business, including employment related matters. Management believes, based on the opinion of legal counsel, that the aggregated liabilities, if any, arising from such actions will not have a material adverse effect on the financial condition or results of operations of Doral Financial.
Since 2005, Doral Financial became a party to various legal proceedings, including regulatory and judicial investigations and civil litigation, arising as a result of the Company’s restatement. For additional information on Legal Matters and Banking Regulatory Matters refer to Note 32 of the financial statements on the Company’s 2010 Annual Report on Form 10-K.
26. Stock Option and Other Incentive Plans
On April 8, 2008, the Company’s Board of Directors approved the 2008 Stock Incentive Plan (the “Plan”) subject to shareholder approval, which was obtained at the annual shareholders’ meeting held on May 7, 2008. The Plan replaced the 2004 Omnibus Incentive Plan. Stock options granted are expensed over the stock option vesting period based on fair value which is determined using the Black-Scholes option-pricing method at the date the options are granted.
The aggregate number of shares of common stock which the Company may issue under the Plan is limited to 6,750,000. No options were granted by the Company for the six month period ended June 30, 2011.
On July 22, 2008, four independent directors were each granted 2,000 shares of restricted stock and stock options to purchase 20,000 shares of common stock at an exercise price equal to the closing price of the stock on the grant date. The restricted stock became 100% vested during the first quarter of 2010. The stock options vest ratably over a five year period commencing with the grant date.
On June 25, 2010, the Board of Directors of Doral Financial Corporation approved and adopted a retention program for six of the Company’s officers (the “Retention Program”). Pursuant to the Retention Program, the Company granted 3,000,000 shares of the Company’s common stock as restricted stock to such officers. The restricted stock will vest in installments so long as at the time of vesting the employee has been continuously employed by the Company from the date of grant, as follows: 33% will vest 12 calendar months after the grant date, an additional 33% will vest 24 calendar months after the grant date, and the remaining 33% will vest 36 calendar months after the grant date. Notwithstanding the foregoing, 100% of the restricted stock will vest (i) upon the occurrence of a change of control of the Company; (ii) if the Company’s terminates the employee’s employment without cause or the employee terminates his or her employment for good reason (as defined in the agreement); or (iii) upon such employee’s death.
On March 22, 2011, five directors were each granted 25,000 shares of restricted stock. The restricted stock will vest in installments as follows: (i) 50% of the shares shall vest 12 calendar months after the grant date, and (ii) an additional 50% of the shares will vest 24 calendar months after the grant date. In April 2011, five officers were granted a total of 1,192,728 shares of restricted stock

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with similar conditions as those granted in June 2010.
Stock-based compensation recognized was as follows:
                                 
    Quarters Ended     Six Month Periods Ended  
    June 30,     June 30,  
(In thousands)   2011     2010     2011     2010  
Stock-based compensation recognized, net
  $ 1,043     $ 56     $ 1,703     $ 73  
 
                       
 
                               
Unrecognized at end of period:
                               
Stock options
  $ 95     $ 214     $ 95     $ 214  
 
                       
Restricted stock
  $ 6,581     $ 8,182     $ 6,581     $ 8,182  
 
                       
The fair value of the options granted in 2008 was estimated using the Black-Scholes option-pricing model, with the following assumptions:
         
Weighted-average exercise price
  $ 13.70  
Stock option estimated fair value
  $ 5.88  
Expected stock option term (years)
    6.50  
Expected volatility
    39.00 %
Expected dividend yield
    %
Risk-free interest rate
    3.49 %
Expected volatility is based on the historical volatility of the Company’s common stock over a ten-year period. The Company uses empirical research data to estimate options exercise and employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend yield is based on management’s expectation that the Company will not resume dividend payments on its Common Stock for the foreseeable future.
Doral Financial’s nonvested restricted stock activity for the quarter and six months ended June 30, 2011 is as follows:
                 
            Weighted-Average  
            Grant Date Fair  
Nonvested Restricted Shares   Shares     Value  
Nonvested at December 31, 2010
    3,000,000     $ 2.74  
Granted
    125,000       1.17  
 
           
Nonvested at March 31, 2011
    3,125,000       2.68  
Granted
    1,192,728       1.11  
Vested
    (1,000,000 )     (2.74 )
 
           
Nonvested at June 30, 2011
    3,317,728     $ 2.10  
 
           
As of June 30, 2011, the total amount of unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan was approximately $6.7 million related to stock options and restricted stock granted. That cost is expected to be recognized over a period of 4 years for the stock options and 3 years for the restricted stock. As of June 30, 2011, the total fair value of stock options and restricted stock was $10.3 million.

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27. Earnings (Losses) Per Share Data
The reconciliation of the numerator and denominator of the earnings (losses) per share follows:
                                 
    Quarters Ended     Six Month Periods Ended  
    June 30,     June 30,  
(Dollars in thousands, except per share amounts)   2011     2010     2011     2010  
Net Income (Loss):
                               
Net income (loss)
  $ 4,477     $ (233,311 )   $ 7,800     $ (236,814 )
Non-convertible preferred stock dividend
                       
Convertible preferred stock dividend
    (2,415 )     (2,415 )     (4,830 )     (4,279 )
Effect of conversion of preferred stock (1)
                      26,585  
 
                       
Net income (loss) attributable to common shareholders
  $ 2,062     $ (235,726 )   $ 2,970     $ (214,508 )
 
                       
 
                               
Weighted-Average Number of Common Shares Outstanding (2)
    127,293,756       67,285,568       127,293,756       64,920,036  
 
                       
 
                               
Net Income (loss) per Common Share (3)
  $ 0.02     $ (3.50 )   $ 0.02     $ (3.30 )
 
                       
 
(1)   The carrying value of the noncumulative preferred stock exceeded the fair value of consideration transferred and, accordingly, the difference between the liquidation preference of the preferred stock retired and the market value of the common stock issued amounted to $31.6 million for the six month period ended June 30, 2010, and was credited to retained earnings. In the case of the convertible preferred stock, the fair value of stock exchanged for the preferred stock converted exceeded the fair value of the stock issuable pursuant to the original conversion terms and, accordingly, this excess or inducement amounted to $5.1 million for the six month periods ended June 30, 2010 and was charged to retained earnings. As a result, both transactions impacted the net income (loss) attributable to common shareholders.
 
(2)   Potential common shares consist of common stock issuable under the assumed exercise of stock options and unvested shares of restricted stock using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from exercise in addition to the amount of compensation cost attributed to future services are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Stock options and unvested shares of restricted stock that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings (losses) per share since their inclusion would have an antidilutive effect in earnings per share. As of June 30, 2011, there were granted 60,000 stock options and 4,323,728 shares of restricted stock.
 
(3)   For the quarters and six month periods ended June 30, 2011 and 2010, net income (loss) per common share represents both the basic and diluted earnings (losses) per common share, respectively, for each of the periods presented.
On March 20, 2009, the Board of Directors of Doral Financial announced that it had suspended the declaration and payment of all dividends on all of Doral Financial’s outstanding series of cumulative and non-cumulative preferred stock. The suspension of dividends was effective and commenced with the dividends for the month of April 2009 for Doral Financial’s three outstanding series of non-cumulative preferred stock, and the dividends for the second quarter of 2009 for Doral Financial’s one outstanding series of cumulative preferred stock.
For the quarters ended June 30, 2011 and 2010, there were 813,526 shares of the Company’s 4.75% perpetual cumulative convertible preferred stock that were excluded from the computation of diluted earnings per share because their effect would have been antidilutive. Each share of convertible preferred stock is currently convertible into 0.31428 shares of common stock, subject to adjustment under specific conditions. The option of the purchasers to convert the convertible preferred stock into shares of the Company’s common stock is exercisable only (a) if during any fiscal quarter after September 30, 2003, the closing sale price of the Company’s common stock for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading date of the preceding fiscal quarter exceeds 120% of the conversion price of the convertible preferred stock (currently 120% of $795.47, or $954.56); (b) upon the occurrence of certain corporate transactions; or (c) upon the delisting of the Company’s common stock. On or after September 30, 2008, the Company may, at its option, cause the convertible preferred stock to be converted into the number of shares of common stock that are issuable at the conversion price. The Company may only exercise its conversion right if the closing sale price of the Company’s common stock exceeds 130% of the conversion price of the convertible preferred stock (currently 130% of $795.47, or $1,034.11) in effect for 20 trading days within any period of 30 consecutive trading days ending on a trading day not more than two trading days prior to the date the Company gives notice of conversion.

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28. Fair Value of Assets and Liabilities
The Company uses fair value measurements to state certain assets and liabilities at fair value and to support fair value disclosures. Securities held for trading, securities available for sale, derivatives and servicing assets are recorded at fair value on a recurring basis. Additionally, from time to time, Doral may be required to record other financial assets at fair value on a nonrecurring basis, such as loans held for sale, loans receivable and certain other assets. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets.
The Company discloses for interim and annual reporting periods the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not in the statement of financial position.
Fair Value Hierarchy
The Company categorizes its financial instruments based on priority of inputs to the valuation technique into a three level hierarchy described below.
             
  Level 1     Valuation is based upon unadjusted quoted prices for identical instruments traded in active markets.
 
           
  Level 2     Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market, or are derived principally from or corroborated by observable market data, by correlation or by other means.
 
           
  Level 3     Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
Determination of Fair Value
The Company bases fair values on the price that would be received upon sale of an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. It is Doral Financial’s intent to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy.
Fair value measurements for assets and liabilities where there is limited or no observable market data are based primarily upon the Company’s estimates, and are generally calculated based on current pricing policy, the economic and competitive environment, the characteristics of the asset or liability and other such factors. Therefore, the fair values represent management’s estimates and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.
The Company relies on appraisals for valuation of collateral dependent impaired loans and other real estate owned. An appraisal of value is obtained at the time the loan is originated. New estimates of collateral value are obtained when a loan that has been performing becomes delinquent and is determined to be collateral dependent, and at the time an asset is acquired through foreclosure. Updated reappraisals are requested at least every two years for collateral dependent loans and other real estate owned.
Residential mortgage loans are considered collateral dependent when they are 180 days past due (collateral dependent residential mortgage loans are those past due loans whose borrowers’ financial condition has deteriorated to the point that Doral considers only the collateral when determining its allowance for loan and lease loss estimate). An updated estimate of property’s value is obtained when the loan is 180 days past due, and a second assessment of value is obtained when the loan is 360 days past due. The Company generally uses broker price opinions (“BPOs”) as an assessment of value of collateral dependent residential mortgage loans.
As it takes a period of time for commercial loan appraisals to be completed once they are requested, Doral must at times estimate its allowance for loan and lease losses for an impaired loan using a dated, or stale, appraisal. As Puerto Rico has experienced some decrease in property values during its extended recession, the reported values of the stale appraisals must be adjusted to recognize the “fade” in market value. In estimating its allowance for loan and lease losses on collateral dependent loans using outdated appraisals, Doral uses the original appraisal as adjusted for the estimated fade in property value less selling costs to

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estimate the current fair value of the collateral. That current adjusted estimated fair value is then compared to the reported investment, and if the adjusted fair value is less than reported investment, that amount is included in the allowance for loan and lease loss estimate.
Residential development construction loans that are collateral dependent present unique challenges to estimating the fair value of the underlying collateral. Residential development construction loans are partially completed with additional construction costs to be incurred, have units being sold and released from the construction loan, and may have additional land collateralizing the loan on which the developer hopes or expects to build additional units. Therefore, the value of the collateral is regularly changing and any appraisal has a limited useful life. Doral uses an internally developed estimate of value that considers Doral’s exit strategy of foreclosing and completing the construction started and selling the individual units constructed for residential buildings, and separately uses the most recent appraised value for any remnant land adjusted for the fade in value since the appraisal date as described above. This internally developed estimate is prepared in conjunction with a third party servicer of the portfolio who validates and determines the inputs used to arrive at the estimate of value (e.g. units sold, expected sales, cost to complete, etc.)
Once third party appraisals are obtained, the previously estimated property values are updated with the actual values reflected in the appraisals and any additional loss incurred is recognized in the period when the appraisal is received. The internally developed collateral price index is also updated and any changes resulting from the update in the index are also recognized in the period.
Following is a description of valuation methodologies used for financial instruments recorded at fair value, including the general classification of such instruments pursuant to the valuation hierarchy.
Securities held for trading: Securities held for trading are reported at fair value and consist primarily of securities and derivatives held for trading purposes. The valuation method for trading securities is the same as the methodology used for securities classified as Available for Sale. The valuation methodology for IOs (Level 3) and derivatives (Level 2) are described in the Servicing assets and interest-only strips, and Derivatives sections, respectively.
For residual CMO certificates included in trading securities, the Company uses a cash flow model to value the securities. Doral utilizes the collateral’s statistics available on Bloomberg such as forecasted prepayment speed, weighted-average remaining maturity, weighted-average coupon and age. Based on Bloomberg information, the Company forecasts the cash flows and then discounts it at the discount rate used for the period. For purposes of discounting, the Company uses the same Z-spread methodology used for the valuations of Doral’s floating rate IOs.
Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions, expected defaults and loss severity. Level 1 securities (held for trading) include those securities that are traded by dealers or brokers in active over-the-counter markets. Level 2 securities include agency CMOs, municipal bonds, and agency MBS. Level 3 securities include non-agency and agency CMOs for which quoted market prices are not available. For determining the fair value of Level 3 securities available for sale, the Company uses a valuation model that calculates the present value of estimated future cash flows. The model incorporates the Company’s own estimates of assumptions market participants use in determining the fair value, including prepayment speeds, loss assumptions and discount rates.
Loans held for sale: Loans held for sale are carried at the lower of net cost or market value on an aggregate portfolio basis. The amount by which cost exceeds market value, if any, is accounted for as a loss through a valuation allowance. Loans held for sale consist primarily of mortgage loans. The market value of mortgage loans held for sale is generally based on quoted market prices for MBS adjusted to reflect particular characteristics of the asset such as guarantee fees, servicing fees, actual delinquency and credit risk. Loans held for sale are classified as Level 2, except for loans where management makes certain adjustments to the model based on unobservable inputs that are significant. These loans are classified as Level 3. Loans held for sale were carried at cost as of June 30, 2011.
Loans receivable: Loans receivable are those held principally for investment purposes. These consist of construction loans for new housing development, certain residential mortgage loans which the Company does not expect to sell in the near future, commercial real estate, commercial and industrial, leases, land, and consumer loans. Loans receivable are carried at their unpaid principal balance, less unearned interest, net of deferred loan fees or costs (including premiums and discounts), undisbursed portion of construction loans and an allowance for loan and lease losses. Loans receivable include collateral dependent loans for which the repayment of the loan is expected to be provided solely by the underlying collateral. The Company does not record loans receivable at fair value on a recurring basis. However, from time to time, the Company records nonrecurring fair value adjustments to collateral dependent loans to reflect (i) partial write-downs that are based on the fair value of the collateral, or (ii) the full charge-off of the loan carrying value. The fair value of the collateral is mainly derived from appraisals that take into

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consideration prices in observed transactions involving similar assets in similar locations. The Company classifies loans receivable subject to nonrecurring fair value adjustments as Level 3.
For the fair value of loans receivable, not reported at fair value loans are classified by type such as, residential mortgage loans, commercial real estate, commercial and industrial, leases, land, and consumer loans. The fair value of residential mortgage loans is based on quoted market prices for MBS adjusted by particular characteristics like guarantee fees, servicing fees, actual delinquency and the credit risk associated to the individual loans. For the syndicated commercial loans, the Company engages a third party specialist to assist with its valuation. The fair value of syndicated commercial loans is determined based on market information on trading activity. For all other loans, the fair value is estimated using discounted cash flow analyses, based on LIBOR and with adjustments that the Company believes a market participant would consider in determining fair value for like assets.
Servicing assets and interest-only strips: The Company routinely originates, securitizes and sells mortgage loans into the secondary market. As a result of this process, the Company typically retains the servicing rights and, in the past, also retained IOs. Servicing assets retained in a sale or securitization arise from contractual agreements between the Company and investors in mortgage securities and mortgage loans. The Company records mortgage servicing assets at fair value on a recurring basis. Considerable judgment is required to determine the fair value of the Company’s servicing assets. Unlike highly liquid investments, the market value of servicing assets cannot be readily determined because these assets are not actively traded in securities markets. The fair value of the servicing assets is determined based on a combination of market information on trading activity (servicing asset trades and broker valuations), benchmarking of servicing assets (valuation surveys) and cash flow modeling. The valuation of the Company’s servicing assets incorporates two sets of assumptions: (i) market derived assumptions for discount rates, servicing costs, escrow earnings rate, float earnings rate and cost of funds and (ii) market derived assumptions adjusted for the Company’s loan characteristics and portfolio behavior for escrow balances, delinquencies and foreclosures, late fees, prepayments and prepayment penalties. For IOs the Company uses a valuation model that calculates the present value of estimated future cash flows. The model incorporates the Company’s own estimates of assumptions market participants use in determining the fair value, including estimates of prepayment speeds, discount rates, defaults and contractual fee income. IOs are recorded as securities held for trading. Fair value measurements of servicing assets and IOs use significant unobservable inputs and, accordingly, are classified as Level 3.
Real estate held for sale: The Company acquires real estate through foreclosure proceedings. These properties are held for sale and are stated at the lower of cost or fair value (after deduction of estimated disposition costs). A loss is recognized for any initial write down to fair value less costs to sell. The fair value of the properties is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the properties, which are not market observable. The Company records nonrecurring fair value adjustments to reflect any losses in the carrying value arising from periodic appraisals of the properties charged to expense in the period incurred. The Company classifies real estate held for sale subject to nonrecurring fair value adjustments as Level 3.
Other assets: The Company may be required to record certain assets at fair value on a nonrecurring basis. These assets include premises and equipment, goodwill, and certain assets that are part of CB, LLC. CB, LLC is an entity formed to manage a residential real estate project that Doral Bank PR received in lieu of foreclosure. Fair value measurements of these assets use significant unobservable inputs and, accordingly, are classified as Level 3.
    Premises and equipment: Premises and equipment are carried at cost. However, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, the Company recognizes an impairment loss based on the fair value of the property, which is generally obtained from appraisals. Property impairment losses are recorded as part of occupancy expenses in the Consolidated Statement of Operations.
    Goodwill: Goodwill is not amortized, but is tested for impairment at least annually or more frequently if events or circumstances indicate possible impairment. In determining the fair value of a reporting unit the Company uses discounted cash flow analysis. Goodwill impairment losses are recorded as part of other expenses in the Consolidated Statement of Operations.
    CB, LLC: Events or changes in circumstances may indicate that the carrying amount of certain assets may not be recoverable, such as for land and the remaining housing units. Impairment losses are recorded as part of occupancy expenses in the Consolidated Statement of Operations.

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Derivatives: Substantially all of the Company’s derivatives are traded in over-the-counter markets where quoted market prices are not readily available. For those derivatives, Doral Financial measures fair value using internally developed models that use primarily market observable inputs, such as yield curves and volatility surfaces.
The non-performance risk is evaluated internally considering collateral held, remaining term and the creditworthiness of the entity that bears the risk. These derivatives are classified as Level 2. Level 2 derivatives consist of interest rate swaps and interest rate caps.
Following is a description of valuation methodologies used for instruments not recorded at fair value.
Cash and due from banks and other interest-earning assets: Valued at the carrying amounts in the Consolidated Statements of Financial Condition. The carrying amounts are reasonable estimates of fair value due to the relatively short period to maturity.
Deposits: Fair value is calculated considering the discounted cash flows based on brokered certificates of deposits curve and internally generated decay assumptions.
Loans payable: These loans represent secured lending arrangements with local financial institutions that are generally floating rate instruments, and therefore their fair value has been determined to be par.
Notes payable, advances from FHLB, other short-term borrowings and securities sold under agreements to repurchase: Valued utilizing discounted cash flow analysis over the remaining term of the obligation using market rates for similar instruments.
Financial Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The tables below present the balance of assets and liabilities measured at fair value on a recurring basis.
                                                                 
    June 30, 2011     December 31, 2010  
(In thousands)   Total     Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3  
Assets:
                                                               
Securities Held for Trading
                                                               
MBS
  $ 830     $     $     $ 830     $ 766     $     $     $ 766  
IOs
    43,750                   43,750       44,250                   44,250  
Derivatives
    9             9             13             13        
 
                                               
Total Securities Held for Trading
    44,589             9       44,580       45,029             13       45,016  
 
                                                               
Securities Available for Sale
                                                               
Agency MBS
    446,956             445,288       1,668       1,142,973             1,141,281       1,692  
CMO Government Sponsored Agencies
    109,630             102,347       7,283       312,831             305,442       7,389  
Non-Agency CMOs
    7,960                   7,960       7,192                   7,192  
Obligations U.S. Government Sponsored Agencies
    94,982             94,982             34,992             34,992        
Other
    11,923                   11,923       7,077                   7,077  
 
                                               
Total Securities Available for Sale
    671,451             642,617       28,834       1,505,065             1,481,715       23,350  
Servicing Assets
    115,785                   115,785       114,342                   114,342  
 
                                               
 
  $ 831,825     $     $ 642,626     $ 189,199     $ 1,664,436     $     $ 1,481,728     $ 182,708  
 
                                               
Liabilities:
                                                               
Derivatives (1)
  $ 3,435     $     $ 3,435     $     $ 5,418     $     $ 5,418     $  
 
                                               
 
(1)   Forward contracts and interest rate swaps included as part of accrued expenses and other liabilities in the consolidated statements of financial condition.

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The changes in Level 3 of assets and liabilities for the quarters and six month periods ended June 30, 2011 and June 30, 2010, measured at fair value on a recurring basis are summarized as follows:
                                                         
    For the quarter ended June 30, 2011  
                    Capitalization             Principal                
            Change in fair     of servicing     Net gains     repayments                
            value     assets     included in     and                
    Balance,     included in     included in     other     amortization                
    beginning of     the Statement     the Statement     comprehensive     of premium             Balance, end  
(In thousands)   quarter     of Operations     of Operations     income     and discount (4)     Purchases     of quarter  
Securities held for trading
                                                       
MBS
  $ 805     $ 25     $     $     $     $     $ 830  
IOs (1)
    41,618       2,132                               43,750  
 
                                         
Total securities held for trading
    42,423       2,157                               44,580  
 
                                                       
Securities available for sale (2)
                                                       
Agency MBS
    1,682                   12       (26 )           1,668  
CMO Government Sponsored Agencies
    7,336                   10       (63 )           7,283  
Non-Agency CMOs
    7,753       (86 )           216       77             7,960  
Other
    11,876                   187       (140 )           11,923  
 
                                         
Total securities available for sale
    28,647       (86 )           425       (152 )           28,834  
 
                                                       
Servicing Assets (3)
    116,299       (3,059 )     2,545                         115,785  
 
                                         
Balance at end of period
  $ 187,369     $ (988 )   $ 2,545     $ 425     $ (152 )   $     $ 189,199  
 
                                         
                                                         
    For the quarter ended June 30, 2010  
                    Capitalization             Principal                
            Change in fair     of servicing     Net gains (losses)     repayments                
            value     assets     included in     and                
    Balance,     included in     included in     other     amortization                
    beginning of     the Statement     the Statement     comprehensive     of premium             Balance, end  
(In thousands)   quarter     of Operations     of Operations     income     and discount (4)     Purchases     of quarter  
Securities held for trading
                                                       
MBS
  $ 796     $ 36     $     $     $     $     $ 832  
IOs (1)
    43,584       1,128                               44,712  
 
                                         
Total securities held for trading
    44,380       1,164                               45,544  
 
Securities available for sale (2)
                                                       
Agency MBS
    1,738                   25                   1,763  
CMO Government Sponsored Agencies
    8,194                   (349 )     (65 )           7,780  
Non-Agency CMOs
    261,129                   129,634       (383,268 )           7,495  
Other
    1,860                   (45 )                 1,815  
 
                                         
Total securities available for sale
    272,921                   129,265       (383,333 )           18,853  
 
Servicing Assets (3)
    118,236       (6,475 )     1,406                   (162 )     113,005